Not so long ago the press service of the IMF released to the speech made by the IMF's first deputy managing director John Lipsky during the US-French seminar in Washington. The report shows that the IMF is concerned about the current situation of the US economy and national currency (which is a global currency).
experts have considered the current financial and economic situation:
What is happening to the US economy?
The world’s biggest economy (25% of the global economy) keeps losing its ground:
· According to the World Bank’s forecast released in March the Chinese economy is expected to outpace the US one by 2030.
· Lipsky assumes that it is going to happen by 2020.
· Not so long ago Standard & Poor's decreased the long-term forecast for the US sovereign debt from “stable” down to “negative” for the first time in 70 years.
· Within the next decade the USA’s net budget deficit is expected to grow by $10,6 trillion up to $25 trillion. In order to pay the debt the US economy should grow by 5% every year within the next 10 years, which is very difficult for a developed country (the Fed Res expect the growth to be half as much).
However another (and more dangerous for the global economy) way for the US to solve its economic and debt problems could be the devaluation of the US Dollar:
· USD is used in approximately 85% of all the currency exchange transactions around the world.
· Dollars make up the biggest part of all the currency reserves around the world.
· China, the biggest holder of the US T-bonds (over $ 1.15 trillion) expresses concerns over the current condition of the US economy. Other big holders of the T-bonds (Japan - $ 890,3B, GB - $ 295,5B and Russia - $ 130,5B) probably support China in its concerns.
· Over the last 1.5 years the US T-bond yield has been declining in value. At the beginning of 2010 it was just 3.35% per annum while during the global crisis it was 2%.
experts remind you that during the period of 1945-2003 the US sovereign debt was reduced from 108,6% to 36% of the GDP. What helped the USA to reduce its public debt? It was the devaluation of the US Dollar. The inflation ate up 57% of the US public debt.
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The USA’s sovereign debt has been rapidly growing since 2006. In advance of the global financial crisis it grew by 75%. By now every American citizen owes to the rest of the world almost $ 47.000.
According to Howard Friend, an analyst for Mig Bank, one of the world’s leading Forex brokers, if the public debt reaches the limit set by the US Congress, the US Treasury will be forbidden to issue new T-bonds (which help Washington settle old debts). It has been seen for decades. It is like pawning valuable things. The difference is that the USA “pawns” papers that are devalued almost instantly. If Obama’s Administration announces a default it will mean the US is not going to pay its debts.
According to the US Treasury Department, on May 16th Washington may announce a default on its debt:
· The US public debt increases by $3.4B every day. On May 16th the debt is expected to reach the limit of $ 14,29 trillion.
· Matthew Zames, the Head of the Treasury Borrowing Advisory Committee, in an open letter to the US Treasury Secretary Timothy Geithner warned that if the limit wasn’t changed in the short run there might be another global financial crisis. The Treasury Borrowing Advisory Committee is a consultative body under the US Treasury Department including the representatives of such “financial tycoons” as Bank of America, JPMorgan, Soros Fund Management, Goldman Sachs, Morgan Stanley etc.
On the other hand, the USA has been living in debt for decades. Since 1946 the US budget surplus was seen only during the period of 1998 – 2001.
Since1946 the US Congress has changed the sovereign debt limit for over 100 times (sometimes a couple of times a year)
At the beginning of the year the debt was equal to 96,5% of the GDP. However, some countries have even bigger debts: Greece – 167,2%, Germany – 176,8%, Portugal – 231,2%, Great Britain – 428,8%! Greece and Portugal defaulted but the economies of the UK and Germany keep recovering. So it appears that the sovereign-debt size is a relative value.
Warren Buffet says it is not terrible when the debt grow in size if the country’s government, companies and population accumulate assets proportionally.
According to , despite all the economic and political disputes between the Republicans and the Democrats the Congress will eventually increase the limit of the US public debt to postpone a default.
The USD index can help to clarify the situation:
• 1.6068 = 123% а(С)
• the wave is completed (?) н8
• confirmation - breaking below 1.5963 (1.5963 - a bearish wave of the senior timeframe, which broke through the SC 1.5794/1.5826)
• if there is no breakout - the upward “Hound” pattern - look for wave A inside etc.
• а(С) м30 1.6039-1.5977
Correction grid н8
1.5962 = 123%
1.5950/53 = 138% + 38%
MF pivot - 1.5984
US default: possible threats for the global economy
experts say there will be no default in May. However in theory it will become possible if at least one of the major buyers of the US T-bonds stops purchasing them.
What are the possible threats of such a default?
· All the US social programs will collapse while the budgetary spending will be sharply reduced.
· The global economy will instantly start collapsing
· All the stock markets around the world will be shocked, the consequences will be unpredictable
· The US Dollar will stop being a global currency
· Investors will face fantastic losses, which well may cause numerous armed conflicts.
Market Leader and would appreciate if you could share you own opinion on the matter by visiting the forum for traders and investors and answering the question:
When will the USA default on its debt?
· Not in the foreseeable future
· During the next global financial crisis
· As soon as the Chinese Yuan will become fairly strong
