Uncle Sam is lumbered with a staggering debt and it’s not looking good. Obama’s going to need the Republicans to make the best of a bad hand, writes Politics Preacher.
There has been some rather scary talk of Greece defaulting recently, and the amount it will cost us as well as other countries, something which this blog has covered.
Something which has had a lot less coverage is the USA. They are in big trouble. They have something called a “debt ceiling” which is at around 14 and a half trillion dollars, a level for which they may not borrow above without approval. Their current national debt stands at around that level, and most analysts agree that between now and the 4th of August, that debt ceiling will be triggered.This will in turn lead to “selective defaulting” a tough thing to define, as no one has yet said who exactly they would be defaulting on.
The Republican party need to agree to Mr Obama’s request to raise the debt ceiling, they however have said that they will not do this unless Obama makes serious changes to his spending plans, with their overall goal being to see some form of austerity measures no doubt similar to the ones in place in this country, and not a moment too soon.
It is indeed exceptionally unlikely that the biggest economy in the world will default on its debts. The potential consequences though are unthinkable. If the USA decide that they are not going to pay the interest due on their debts, they will trigger panic, the rate of interest the USA will be required to pay in order to service their debt will skyrocket, they will also lose their triple A credit rating.
However, there has already been some talk of the USA losing it’s triple A credit rating as it is, the Republicans could have a role to play in preventing this from happening. Let me explain –
Scenario A, very unlikely: The USA defaults on its debt, credit rating falls rapidly, costs billions more a year to service debt, bond values fall, possibly triggering another banking crisis as the value of bonds held by banks has plummeted.
Scenario B, plausible: Obama manages to get the debt ceiling raised without making admissions to The Republicans. In this situation, it is plausible that within a few months to a year, the USA could lose it’s triple A credit rating, which would cause an effect similar although not as bad as Scenario A.
Scenario C, very plausible: The Republicans manage to negotiate some form of austerity out of the Obama administration, consequentially bond traders will be reassured, triple A credit rating will remain.
The fact of the matter is that these bonds do not just effect the USA government and the American people. For years American bonds have been seen as the pure risk-free investment; it is used worldwide for investors to predict what returns they would require on a potential investment, once they account for risk and other factors. Quite simply, America can borrow at cheaper rates than any other nation, and that could be about to change.
What about you though? If you are lucky enough to have a private pension, there is a good chance that they will hold long term bonds issued by the US government, which could affect your pension fund, sickeningly it will be most likely to affect you if you selected a very low risk pension, as American bonds would have made a lot of their portfolio.
But as I have said, the chances of the USA defaulting on its debt is very unlikely and no doubt there will be an agreement behind closed doors. What is more important though, is that this should come as a wake up call to the USA, they can not bury their head in the sand and let the debt mount up. At 14 billion dollars it is the best part of 6 times the UK GDP for a year… The Republicans could be the ones who save the day, and deserve to exploit the political capital that they can get from such a feat.