Monday, July 25, 2011

US Debt Crisis Still Unresolved

August 2nd is only eight days away and the US government still has not reached a budget deal. This could cause serious problems not only for the American people, but also for the financial institutions as well.

Currently, emerging-market stocks (definition of emerging market here) are currently declining “as a stalemate over increasing the U.S. debt limit raised concerns of a default that could threaten the global recovery.”  This has a serious effect on US markets, as can be seen by the fact that “The Standard & Poor’s 500 Index retreated 0.3 percent after falling as much as 1 percent.”

Things may get worse as there doesn’t seem to be much hope, with each side having rival debt plans. The Republican Speaker of the House, John Boehner, is imagining “an increase in the nation's debt limit by $1 trillion and slightly more than that in federal spending cuts, with the promise of additional progress on both sides of the ledger if Congress could agree,” while Democratic Senator Harry Reid is “at work on legislation to raise the government's debt limit by $2.4 trillion — enough to assure no recurrence of the current crisis until 2013 — and reduce spending by slightly more.”

In addition to this, Americas should be worried as the IMF has told the US “to resolve its debt crisis amid warnings from one of the world's most influential investors that the country risked losing its triple-A credit rating within months because of the reputational damage caused by the ongoing disagreement over the debt ceiling.” Also, a bond chief has warned that America’s triple-A credit rating is in danger.

One important item of both plans that should be noted is that neither plan considered increasing taxes. While this is just the Republicans towing the party line, for the Democrats, they are selling out and throwing in the towel. The essential problem with the debt is that US has both a spending and a revenue problem (see this and this as well), thus in order to balance the budget, America needs to cut spending and increase taxes.

Overall, the main problem is that both parties are blaming one another even though Americans favor compromise. Once again, both parties are showing that they care more about party politics than the business of saving the country from economic destruction.

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