The US is broke, declares former Treasury chief James Baker

The United States needs a "grand bargain" on deficit reduction if it wishes to retain its diplomatic and military influence, a former cabinet member of two presidential administrations has warned.

The warning comes as time runs out for the US to avert spending cuts of US$85 billion (Dh312.2bn) due to kick in today.

Although America has recovered from the financial crisis, persistent fiscal deficits were a severe challenge facing the world's biggest economy, said James Baker, who served as the Treasury secretary to Ronald Reagan and as secretary of state to George HW Bush.

"We may have put the Great Recession behind us but we're far from achieving robust growth," he said at the NBAD Global Financial Markets Forum yesterday in Abu Dhabi.

"We are, in fact, broke," he added, saying that without the dollar's status as a reserve currency the US would likely have already faced a debt crisis.

The current calm on financial markets was not to be taken for granted, Mr Baker added.

"What's happened in Europe over the last several years is a cautionary tale," he said. "Debt crises can come on you with frightening speed … Right now we're enjoying extremely low rates and manageable debt servicing. When rates begin to rise our debt problem will darken considerably."

The US has faced a series of escalating congressional battles over its $16.6 trillion debt burden, which rose sharply as a result of tax cuts passed by the George W Bush administration and the cost of bailing out large chunks of the American financial services industry.

The country's indebtedness was equivalent to the size of the entire US economy in 2011, according to the Bank for International Settlements.

The White House and congress are attempting to reach a deal to avert the so-called "sequester", a package of $85bn in automatic spending cuts that are due to take effect today.

The austerity measures are a leftover of the debt ceiling battle of summer 2011, intended to force a compromise by politicians by being so unpalatable to both parties that they would be forced to work together to forge a deal on deficit reduction.

With the deadline to reach a deal only days away, the senate confirmed president Barack Obama's appointed Treasury secretary, Jacob Lew, late on Wednesday.

ghunter@thenational.ae