Tatiana Kashyrskaia
The day when the US may default on its debt (August 2nd) is getting closer. The entire world is pondering on the problem. The US economy is the world’s biggest one (25% of the global GDP). But the main thing is that nobody knows what comes next if the US eventually defaults on its debt because the entire global economy depends on the US debt obligations.
A US default will initiate a wave that will be more dangerous than the Japanese tsunami as it will hit the entire world. Yet there is no defensive plan in case the US economy and financial system collapse. That is why there is no point in getting ready for a US default.
The US public debt: what are the threats for investors?
A sovereign default is a failure by the government of a sovereign state to pay back its debt in full. According to Investopedia, technical default means a deficiency in a loan agreement that arises not from a failure to make payments as promised, but from a failure to uphold some other aspect of the loan terms.
The USA may face the biggest default of all times. Who is to be blamed?
· Even though a donkey is the symbol of the Democrats, it is the Republicans (the Congress majority) that have been stubborn like a donkey so far. Until now the Congressmen have lifted the debt ceiling for 78 times without any questions on the US Government’s request. But now there seems to be a problem. Some Republicans even say that a technical default won’t do any harm to the US economy.
· The US economic strategy that has been pursued for decades goes “living at the expense of the rest of the world once there is an opportunity”. It was sufficient to make the entire world abandon the Golden Standard after WWII and make the US Dollar the global reserve currency and to unpeg the Dollar from gold in the 1970s. By that time the entire world was already addicted to the US currency. Thus, the US got an opportunity to solve its financial problems by printing more money.
· The USA’s high living standards depend mostly on governmental support (cheap consumer loans). Moreover, the US consumer spending makes 2/3 of the national GDP.
Is a US default possible at all?
Analysts for RoboForex, a broking company, say that few people really believe that the US can actually default on its debt.
· The disputes between Obama’s administration and the Congress are of political nature. The US economy is slowly recovering. The country’s unemployment rate is 9.2% which is less than in the EU (9.9%).
· There are no economic grounds to announce a default. Of course, Washington borrows $125B every month and the US debt will reach 100% of the national GDP in late 2011. However, the situation in other countries is even worse.
· Politics. A year before the forthcoming presidential elections neither the Democrats nor the Republicans want the common Americans to blame them for the difficult economic situation the country will arrive at in case of a technical default. That is why sooner or later they will compromise and lift the debt ceiling until August 2nd.
Christine Lagarde, Managing Director of the IMF, is absolutely sure that the federal debt limit will eventually be raised.
Moody’s Investors Service went as far as to offer the US authorities to cancel the limit (i.e. to remove it from the US Constitution through an amendment). However, it is impossible because no country can let the government borrow forever and without any limits.
What if the US eventually defaults on its debt? Let’s assume that it has happened. According to the experts of , in this case it will be an apocalypse.
The US T-bond yield will grow significantly, thus making the US public debt much more expensive to service.
The net amount of the US T-bonds owned by foreign central banks is equal to $4.45 trillion. They are not going to sell them cheap. The question is whether they will buy more of them in the future? The US is currently risking its reputation:
· The unreliable US bonds will bring into question the value of the US stocks, thus making the US stock market collapse.
· The common Americans and the US economy will face a severe blow, the consequences of which are hard to imagine.
· The only way out (Plan A, B and C) is to lift the debt ceiling.
Is the global economy able to save the USA?
The global economy (all the other national economies) just cannot save itself and the US. A US default is the inability of the global economy to support the USA rather than the USA’s inability to pay its debts, experts say. The US public debt increases by 14% every year.
Nouriel Roubini assumes that the US economy is in agony – the USA will eventually default on its debt within the next 2 years.
USD perspectives:
According to the Department of Masterforex-V TS, the price of the USD index futures keeps moving in a narrow range after failing to consolidate above 76,17.
The future succession of events will be conditioned by the direction in which the price comes out of the range: either consolidation above the upper border of the range (the next target is 78,86) or consolidation below the lower border with updating the low of the year and moving towards 70,98.
Market Leader and would be very grateful to you for participating in a survey. Please, visit the Academy’s forum and answer the question given below:
Will the Congressmen finally approve the decision to lift the debt ceiling until August 2nd?
· Yes, they will
· No, they won’t
· Your own opinion
Tatiana Kashyrskaia
