Tuesday, April 12, 2011

You aint seen nothin’ yet ….

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

So the U.S. government didn’t shut down thanks to an agreement to cut an extra $38 billion of spending (compared with deficit of around $1.4 trillion).  We’ve been here before and life has always gone on.  However, perhaps a more frightening situation is coming up.  The U.S. is about to hit its legal debt ceiling of $14.3 trillion which is getting on towards 100% of GDP.  These numbers just beggar belief.  The U.S. is now the only major economy with such debt and deficit problems that has not introduced some sort of realistic austerity program so the situation keeps getting worse.  Other stats can be quoted that compound the grief – or determination to act – that perhaps should be felt. 

Of course, we’re constantly told that the U.S. is different.  The economy has unequalled potential, it always grows, foreign investors hold so much U.S. debt that if they didn’t keep buying it, their investment would lose value, etc., etc. 

Nobody expects a U.S. debt default but more and more people mention the possibility before coming up with the aforementioned reasons why it will not happen.  But, surely the party cannot go on forever.  Something has to give and with the American form of dysfunctional government, it may take some external event or shock to cause the very painful action required. 

This of course would affect, not only the U.S. dollar but many, if not all other currencies in terms of volatility.  I will leave open the question of: what should companies be doing?  As a partial answer, companies should be thinking very seriously about various scenarios.  They should know and understand their currency and interest rate exposures in a far more detailed, scientific and meaningful way than the traditional “have a handle in my head” of the CFO’s and treasures of many businesses. 

I will expand on this in coming blogs but it would be interesting to have some discussion of how big an issue others see this as being.

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