He says the US risks defaulting on its $14.3trn debt unless it comes up with a deal to raise the borrowing limit by 2 August. Arguments and debates are underway as to how best to avoid a default, with various spending cuts and tax increases mooted.
Leaviss feels officials will find a short-term fix in the coming days, pushing back the issue for now but a downgrade of US debt remains inevitable. “I’d be staggered if there wasn’t a fix in the next few days," he says. “They’d be idiotic to go to the wire and miss a coupon payment.”
According to Leaviss there has been too much attention to the 2 August deadline, with many missing the point, adding: "The US has been gradually going bankrupt for years.”
Much of it springs from the two recessions of the past decade (2001 and 2008) as well as the increased defence spending and war activities. But Leaviss notes retiring baby boomers aren’t helping, with increased pressure on US social security and medical costs.
While a short-term fix is expected soon, it remains just that, short-term. If the US doesn’t address the longer-term problems it faces, rating agencies such as Moody’s and S&P will have no choice but to downgrade US debt, he notes. That remains a scary option for the world economy.
“The damage it will do to the global economy can’t be underestimated, the world just can’t cope with it right now,” Leaviss says. While he understands why S&P and Moody’s would downgrade the US to AA, or below, he hopes they will hold off for as long as possible.
“Once you spend 10% of your revenue to service debt, you’re no longer a AAA economy,” he says.
This may be where the US is currently headed but at the same time, it is paying interest at historically low rates. If inflation trends higher, what the US is spending just to service its debt could spike even higher.
What we’re seeing at the moment is the end of an economic empire, Leaviss adds.
