Thursday, July 14, 2011

US Debt Ceiling: What Will Happen If It Isn't Raised?

Today the influential credit rating agency, Moody’s Investors Service, put America’s triple-A credit rating on “watch for a potential cut, following a delay in the decision on whether to raise the country’s $14.3 trillion debt ceiling to August 2, a move that increases the chances of a default by the US Treasury on a debt payment.” The business community and many investors around the world are worried that the US could potentially default on its debt, seeing as how the debt over $14 trillion and Congress seems unable to make up its mind as whether or not to raise the debt ceiling. While there is much talk of the debt ceiling, an examination of what could happen if the debt ceiling wasn’t raised needs to take place.

While the chance of the US not raising the debt ceiling and defaulting on its debt is quite small, it has been announced that Social Security checks may not be able to be sent out if the debt ceiling crisis is not resolved. This is because if the debt ceiling issue is not solved, the “Treasury won't be allowed to borrow new money to make up for the gap between revenue and spending” and about “$125 billion of bills on average may have to be put off.” In such a scenario, choices will have to be made as to which checks are paid out and which aren’t and undoubtedly people are going to suffer.

Yet, this is only a short-term fix for the US debt situation. In the long-term, it has been speculated by Chinese credit rating agency Dagong that the US will default. Guan Jianzhong, chairman and CEO of Dagong stated:

"Raising the limit is just a legislative measure to allow the government to borrow more money, but it does not change the fact that the US lacks momentum for economic growth.”

And that:

"The fundamental problem is that the US' ability to generate wealth is far from compensating its increasing debt, and "paying debts by borrowing more is not a solution.”

This speculation is further backed up by David Murrin, chief investment officer at Emergent Asset Management when he told CNBC:

"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it."

Murrin makes the argument that “emerging markets have a distinct advantage over more mature economies through demographics, working dynamics, and the ability to create fundamental economic growth” and that this imbalance “inevitably pushes developed markets towards default.”

And in the long-term, that is the real question. When will the US default on its debt and what will occur to America and the world because of it?

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