PurchasingB2B

The ups and downs of debt

On August 1, with only a few hours left before the US national debt would hit its limit, that country passed emergency legislation letting the government borrow more, effectively raising the $14.3-trillion debt ceiling.


September 15, 2011
by Michael Power

Purchasingb2b: July August 2011

I have a close friend who, although very smart, isn’t particularly careful with his money. Years ago he got into trouble with credit card debt. Perhaps you know of someone who has done this: he had about four credit cards and began using one credit card to pay the balance on another. Then, he would pay that credit card off using yet another one. He would rotate his payments in this fashion between the four cards, switching from one card to the next as they became due.

My friend had the sense to consolidate his payments and is now debt free. I wonder if the US government will eventually show the same sense with that country’s debt.

On August 1, with only a few hours left before the US national debt would hit its limit, that country passed emergency legislation letting the government borrow more, effectively raising the $14.3-trillion debt ceiling. Along with this increased borrowing cap, the legislation promises budget cuts of more than $2 trillion over the next decade.

Crisis averted, right? Well, rather than solving the US debt drama, the move paves the way for further spending in the future. None of these cuts is binding. As well, they’re set to take place over the next decade. I suspect the US will continue to ignore its spending, borrow money, and keep taxes insanely low. As Michael Hlinka argues in his Business Front column on page 6, that debt ceiling will simply continue to rise.

On top of that, the crisis caused the US-based financial services company, Standard & Poor’s, to downgrade its credit rating of the US from a AAA to only AA. The markets have fallen 10 percent from a high in May. As well, Europe’s debt trouble is very real and could, as some have suggested, become on par with the financial crisis of 2008.

Economic uncertainty is rarely helpful. Inflation looms in the US since the country is now printing money like mad due to the crisis. But falling confidence in the US dollar means ours has been soaring above parity. A higher dollar is clearly good for consumers, since it means lower prices on imported goods. Procurement managers and their organizations are also affected by a high dollar, since it means more bang for the buck from offshore purchases.

How should Canada handle US and European debt woes? I’d like us to continue focusing on strengthening ties with the Asia Pacific and Latin America. Prime Minister Stephen Harper is on track by visiting Brazil and pursuing more open economic relations between us and Latin America’s largest economy.

In Asia, China is an avid consumer of commodities, which we produce in plenty. Even Japan will rebound from its triple disaster earlier this year. So while our shared border will always align us closely, not every economic egg needs to be in the US basket.