On May 17th Timothy Geithner, the US Secretary of the Treasury, informed the US Congress that the country’s public debt had reached the limit of $14,294 set by the legislators. He said that if the Congress and the Senate didn’t increase the limit of the US public debt, then Washington wouldn’t be able to fulfill the obligations and would have to announce a default. Timothy Geithner considers the offer to reduce the budget spending made by the Republicans (the legislative majority and Obama’s opponents) nothing but “political games” because austerity measures cannot take immediate effect while the USA’s possible default will cause a devastating global crisis, which will be way more severe than the crisis seen in 2008-2009. Can the country with the world’s biggest economy really default on its debt? How long will the USA be able to feed at the expense of the entire world? Does a default bring only economic problems?
Why didn’t the US default on its debt on May 16th?As it was expected the sovereign debt limit was reached on May 16th. Why didn’t Washington announce a default on its debt? The US Congress didn’t increase the limit at once. So the US government had to take some steps to avoid such a situation:
· The US Treasury Department suspended depositing to the country’s 2 biggest pension funds
· They worked out a plan to lend a multi-billion loan from the government’s special funds.
· As an extreme measure, they consider the sales of some state-owned property – land, fixed property etc.
Timothy Geithner warned the Congress that they (the Republican majority opposing Obama) have 11 weeks to change their minds and make an increase in the max debt size.
Political games or economic necessity?
Some government officials blame the Republican majority of the Congress for playing political games. Is it true? According to the US and Canadian Association of Traders and Investors under , they are partially right. However, the Democrats play political games as well:
· In Feb 2011 President Obama presented a program aimed at reducing the US sovereign debt by $1.1 trillion within the next 10 years. However, the Congress Commission (including the representatives of both the parties) says that according to their calculations it is possible to stabilize the budget only if the public spending is reduced by $3.9 trillion.
· According to the Wall Street Journal, the Republicans are going to introduce to the Congress another program aimed at reducing the budget spending by $4-5 trillion.
· John Boehner, Speaker of the US House of Representatives, assumes that President Obama doesn’t understand (or at least he pretends that he doesn’t understand) how serious the situation is.
Can the Republican majority prevent the Congress from increasing the limit even in August? Masterforex-V experts say it is hardly probable. However, it is obvious that they are getting more active in their efforts to make the Republican President Obama more saving.
Does the entire world feed the economic vampire?
Since the end of World War II the US budget saw a surplus only during Bill Clinton’s presidency. The USA is used to living in debt and believes that the entire world owes it. Some experts of have noticed an important detail: Timothy Geithner asks to increase the debt limit but doesn’t say a word about increasing the payments of the existing debts. By September the US debt is expected to reach 102.6% of the GDP!
The US keeps being comfortable. In 2010 the budget deficit was equal to 10.5%, while other countries have to implement austerity measures. For example China, the world’s 2nd largest economy and the holder of the US T-bonds to the amount $1 trillion, has recently increased the interest rates for 4 times, reducing the inflation level by 0.1%,and will keep doing that.
According to the former Managing Director of the IMF Dominique Straus-Kahn, in order to regain the control over its budget the US will have to reduce its spending by more than 30%, which is almost impossible: 10-12% of the Americans’ income comes from direct subsidies from the US Treasury. If the budget is cut it will instantly cause a decline in the domestic demand.
The Russian Finance Minister Aleksey Kudrin says that Moscow is concerned not about the USA’s net public debt but about the fact that the entire world has come close to the stage when it cannot “digest” the inflation any more.
Moreover, the American ways of combating inflation and public debt affect the entire world not only in terms of economy. The food price growth caused by the Arab East revolutions is directly caused by the continuous money-printing activity of the US Mint.
The money will get more “expensive”
The US cannot but start implementing austerity policies. Not only the common Americans but the entire planet will have to pay for this. The policy of demand stimulation has proved to be ineffective for coming out of the crisis. So, there is only one way out –to revalue the money:
· For example, remember the “Reaganomics” of the 1980s. The resources got more expensive and caused a wave of bankruptcy, which helped the US to get rid of weak players but reduced its import and credits.
· Expensive resources will seriously affect the commodity-rich countries, including Russia. The ineffective Russian economy will have to slow down while the nationwide projects will face the deficit of funds.
The experts of are sure that the USA won’t follow the path of Greece, Ireland and Portugal . However, the US financial policy will undergo serious changes in the near future. If the changes take the form of fundamental reforms then the US dollar will probably regain its positions as the global reserve currency.
According to the Department of called “The forecasting system based on the improvement of АО and WPR”, EURUSD keeps developing the ABC retracement of H4 = the formation of wave ВH4. (upward wave Ch1 is being formed inside of ABC h1).
Market Leader and would appreciate if you could visit the forum for traders and investors and express your own opinion on the matter by answering the following question:
Is it worth to expect the US default this year and is it time to get rid of US dollars?
· No, it isn’t. It is not in the Republican’s strategic interests. The US Dollar may strengthen.
· Yes, it is. The US may try to solve its debt problem at the expense of the global economy. So it is time to get rid of dollars.
