The Obama Administration has reluctantly launched the ten year long spending cut through “sequestration.” For the current year, till the end of September, the Administration has decided to make $85 billion cut in expenditure. Of course, the effects of expenditure cut may not remain largely within the US.
The US is the world’s largest consumer and when it starts austerity though budget; the effects will be more recessionary on the global economy. Already, global trade is declining at the pressure of shrinking GDP in the west. Traditional export oriented economies like Japan are depending upon negative strategies like currency war to promote exports and thus to survive in this bad time.
The worst part of the US spending cut is that it comes at a time when the world economy is searching for positive economic momentum to escape from recession. Effects of spending cut definitely indicate that the US can’t bring any positive news for the world economy in the effort to reverse the recessionary trend. If one look at the rest of the world, countries including China are not big consumers like the US, capable of bringing sizable impact on the world economy. This is because, if the US is the largest consumer, China is the largest exporter.
Even greater importance about the US spending cut is that it may bring negative business momentum in the global economy in the form of reduced imports and outsourcing for the US.
If we make a historical interpretation of the spending cut in the context of the prevailing recession, the implication is that for the first time since the beginning of 1950s, the US economy doesn’t look formidable to bring positive impact on the world economy. The trend may continue in the immediate future as the US is indulged in its effort to cut down public debt.