Debt default is hanging over the United States like the sword of Damocles. After a month of sterile negotiations the Democrats and Republicans remain at loggerheads over tax increases and spending cuts, with the Republicans insisting only on the latter before they will agree to a raising of the US’ debt ceiling.
Only Congress can do this. If it is not done, the US will not be able to borrow more, and cuts will be inevitable if the bills are to be paid.
The USA hit its borrowing limit in May, $14.3 trillion. If by August 2 the limit has not been raised, the US will default on its payments to creditors.
The markets are starting to factor in such an eventuality, as incredible as it may seem.
People like Sam Stovall, the Chief Investment Strategist for Standard and Poor’s, fear things could come to a head.
He said: “I think even though the unthinkable is something that most people on Wall Street are not expecting, meaning that Congress will not come to an agreement on raising the debt ceiling, every day that goes by we get a little bit more and a little bit more concerned that maybe they will do the unthinkable.”
The US’ hitherto untarnished reputation for solvency was rocked on July 13 when ratings agency Moody’s said it was reviewing America’s AAA credit rating, only given to the most reliable debtors.
Standard and Poor’s followed the day after. As the US economy is also so sluggish and — after years of consumption boosted by cheap credit — the debt is seriously tilting the once healthy economy into the dangerous zone.
America’s 2011 public debt stands at 11 percent of GDP. It is essential this is now reduced.
Everyone agrees on the urgency of this, but President Obama wants a balanced agreement.
“All of us agree that we should use this opportunity to do something meaningful on debt and deficit,” he said on Monday.
The problem remains how to cut the debt, and the Republicans are insisting the benefits system is too generous.
“The president continues to insist on raising taxes and they’re just not serious enough about fundamental entitlement reform to solve the problem for the near-to-intermediate future,” said the House of Representatives speaker John Boehner.
Obama’s deficit reduction plan targets a four trillion cut over the next 12 years by making savings on the Medicare and Defence budgets, and ending tax breaks for the rich.
The Republicans want 5.8 trillion dollars trimmed from the deficit over 10 years, done by privatising Medicare, cutting the education and environmental budgets but maintaining tax breaks for rich Americans.
Democrats and Republicans have, in the past, always managed to agree, but the Tea Party Republican radicals are blocking any deal. For them “taxes” and “compromise” are swear words, and they are itching for a fight.