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8 graphs showing why investors are nervous about US tax plans
The US has extended the 'Bush tax cuts' implemented by Barack Obama's predecessor. Many say the move may boost growth but others are worried about what it means for America's growing debt. These 8 graphs, from the IMF, are worth revisiting to see why.
by Deborah Hyde on Dec 08, 2010 at 08:51
The rising cost of keeping the US recovery on track
In 2010 many emerging economies began to withdraw (tighten) some of the money they had used to stimulate growth.
But in the US yet more money will be spent in 2011 - with 'QE2'. The decision to extend tax cuts and benefits will add $4 trillion to US debt. It was already $13.8 trillion and rising before the news.
Some of the highest debt and it is set to rise
US debt is much higher than average and like Greece and Ireland, its debt will continue to grow in 2011.
US debt was forecast to rise to over 99% of GDP in 2011. Debt above 90% is expected to suppress growth but the new tax rules are expected to boost growth..
Will investors remain calm?
The blue line in the right hand graph shows investors have been happy to take quite low returns on the money they lend to the US government. After the latest tax deal the yield on US 10 year bonds has risen to 3.19% - its highest level since June.
Note that the scales are different on the two graphs.
The cost of insuring loans also shows investors are unworried
The yellow column shows how much more it now costs to insure loans to different governments than it did a year ago.
The cost of insurance has soared for Greece, Ireland and Portugal but not for the US.
US debts fall due sooner than most
The IMF points out one thing that makes countries vulnerable is how soon their debts fall due.
Here we can see that the average length of US loans is shorter than in many European countries.
Who does the US owe money to?
Nearly as many non-Americans have loaned money to the US government as Americans.
That too makes the US more vulnerable than other countries if we accept that domestic investors are less likely to jeopardise their country's well-being.
US government spending is set to soar
An ageing population means the situation is only going to get worse as the US government spending levels are set to grow.
Credit ratings agency S&P has warned the US needs to look at the issue of rising pension costs but so far no plans have been drawn up to address either pension or health costs.
Not yet a cause for concern
The credit ratings agencies have said America's rating is safe even after the new plans... but Fitch warned the US needs a credible plan 'which would strengthen investor and international confidence in the US commitment to sound public finances and its 'AAA' status.'