The US Congress has rejected President Obama’s request to increase the limit of the US public debt. The legislators say the debt is too big to allow it to grow by $2.4 trillion more.
According to the experts of , it was hardly probable that the current membership of the Congress (the Republicans constitute the absolute majority) would help Barack Obama - a Democrat - to solve the problem. The political component of such a decision is on the surface. The presidential elections are near (2012). That is why the opponents are trying to fail each other. However the struggle for the presidency cannot account for all the complexity and jeopardy of the current situation. Now Obama has 2 months to make the Congressmen change their minds. If he fails to do that, the US will have to technically default on its debt. Taking into account that about 30% of the US debt (over $4 trillion) belongs to foreign investors, the default may seriously affect the entire world.
What does the Congress demand from the President?
318 members of the House of Representatives voted against increasing the debt limit by $2,4 trillion. There were only 236 Republicans among them, the other 82 members were Democrats like Obama. Only 97 members voted for the increase.
· Barack Obama says that the debt limit needs an increase in order to defend the USA’s image and to avoid the catastrophic consequences for the American citizens.
· The Congressmen opposing Obama’s offer say that it is them who try to defend the US citizens. The Congressmen say they wil consider the possibility of raising the debt limit only on condition that the budget spending is reduced to a great extent.
· Obama’s Administration doesn’t deny the spending reduction and keeps taking actives steps:
- The allocations to the country’s 2 major pension funds have been suspended
- The pension payments will probably be reduced further
- The program of large-scale privatization is in the process of formation
- Within the next 10 years the government is planning to save about $1 trillion.
· The Congressmen see other ways out: they say that in order to pay off the debt it will be necessary to sell a considerable share of the country’s valuable assets (including gold).
· As for the Democrats, they will have to abandon the tradition of giving generous social presents in the run-up to the presidential elections.
The US public debt: what are the possible threats for investors?
According to the US-Canadian Association of Traders and Investors under , the US public debt is huge - $14,3 trillion – and is growing by $1 million every single minute:
· The first debt limit in the US history was set in 1917 and was equal just to $11,5B. Since March 1962 the public debt limit has been increased for 74 times. They have already increased it for 10 times since 2001.
· Today the US public debt is equal to 72.4% of the GDP. It is not so huge in percentage terms. There are even worse examples: in 2010 the Euro-zone’s net public debt reached 85,1% of the GDP while the EU’s debt was equal to 80% of the GDP. Ireland’s public debt is 96,2% of the GDP, Belgium’s - 96,8%, Italy’s – 119%, Greece’s - 142,8%;
· According to numerous experts, in 2011 the deficit of the US budget will reach the record of $1,5 trillion (in 2010 it was $1,3 trillion).
· In mid April 2011 Standard & Poor's downgraded the USA’s long-term rating forecast from stable down to negative. Other rating agencies may follow the S&P’s example. Investors from around the world are monitoring the US ratings.
· Most central banks are holders of the US T-bonds. China owns the bonds to the amount of $1,16 trillion, Japan - $882,3 B, Great Britain–$272,1 B, A group of 15 oil-exporting countries including Venezuela, Iran, Iraq, Kuwait, Saudi Arabia, Libya, Nigeria - $211,9 B, Brazil - $186,1 B, the Caribbean Basin countries - $168,6 B, Taiwan –$155,1 B, Russia –$151 B, Hong Kong –$134,2 B, Switzerland –$107 B.
What does Obama offer?
According to the President’s plan the public debt will be reduced by $3 trillion within the next 10 years and by $4 trillion within 12 years:
· Apart from the mentioned measures he offers to reduce the financing of the country’s defense and healthcare.
· Other unpopular but necessary steps are tax hikes and benefit cuts
· James "Jay" Carney, White House Press Secretary, says that if the Congress doesn’t approve the plan the USA will face an “Armageddon”.
· As we know, the Congressmen didn’t approve the plan in the first reading. So Barack Obama has 2 months to make them change their minds.
What should investors get ready for within the next two months?
Most experts are sure that the congress will eventually increase the debt limit. Otherwise the consequences may be catastrophic for the Americans. The rating agencies will downgrade the country’s credit rating. The US Dollar will devalue while the world will lose confidence in it:
1. The decline of the USD exchange rate. The controlled and insignificant decline of the US Dollar is acceptable for Washington, but not the collapse of the American currency. That is why the debates on the matter may be intense until August 2nd. Both the sides will probably be showing their principle stands, which will definitely make the US Dollar slightly decline in value. At the same time the USA will be paying off its debts in order to avoid a default. Then the US Congress will eventually increase the debt limit just in time.
2. Investments in gold. At that time the central banks will prefer to buy gold and other major currencies. The US Dollar will be losing its positions.
3. Safe heaven assets. Against the background of the declining US Dollar investors will start looking for safer assets to convert their dollar reserves into. The markets may see a lot of bonds and other securities issued by the “developing” countries as investment alternatives.
4. Tension for investors. Anyway during the whole summer the US will be keeping investors around the world electrified while constantly discussing the debt limit problem.
USD perspectives:
The professional traders form the Department of Masterforex-V trading system say that the bullish wave 72,86-76,54 has failed to turn into a reversal wave A: the movement stopped around 76,18 – the 38,2% resistance level. There is a new bearish wave 5/А of Daily/Weekly being formed from the starting point of 76,54. 72.86 is the main resistance level.
Market Leader and would appreciate if you could express your opinion on the matter. Just visit the Academy’s forum for traders and investors and answer the following question:
What are the near-term perspectives of the US Dollar?
· The US currency will lose in value a little.
· The US Dollar will collapse
· It will grow in value against other major currencies
