US: the next crisis, or the next opportunity?

Investors are familiar with the present euro debt crisis, but are they ready for the next one? The US faces a series of challenges in coming months, which some believe it will cope with while others are not so sure.

The US, the world’s leading economy, trades on the belief that its culture of dynamic entrepreneurship, its ‘can-do’ political attitudes, and its sheer size and resources will ensure it never again sinks into another Great Depression. Even if it has its problems, the country has proven status as a safe haven for investors amid global uncertainty.

Earlier this year, when other markets were weighed down by the European debt crisis, anecdotal evidence suggested the smart money was heading West, where Alan Greenspan’s famous ‘green shoots’ of economic recovery were once again starting to sprout.

“As we went through May and June, the Greek election, the Spanish bank bailout and the EU leaders’ meeting were the only topics up for discussion at client meetings,” notes one analyst. “If the [US] Fed was even mentioned, it was in relation to what it might do in response to a further deterioration in Europe.

“But, following the EU communique of 18 June, discussion has centred on the US, the 1 August FOMC [Federal Open Market Committee] meeting, the fiscal cliff, the election, the poor employment data and the disinflationary trends. At least for US and Asian clients, European issues have been moved squarely to the back burner since early July.”

At the ‘fiscal cliff’ edge

With Europe’s bad news apparently priced into the market, the question for many investors is whether the US now represents the next crisis, or the next opportunity.

November brings the final chapter of the two-year presidential election campaign. Europeans bemused by the US electoral system have realised, with less than 100 days to go, that this is a very close race with serious consequences.

The term ‘fiscal cliff’ is the latest phrase for a whole chain of events wrapped around the forthcoming presidential election.

By next year, the US government has to decide whether to implement current policies of spending cuts and tax rises, which will weigh on economic growth and prolong the slowdown, or adjust those policies, which would hike the already vast budget deficit, and leave the US with the kind of debt burden facing Europe.

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