The US Debt Crisis

By Apoorva Goel

  

No. That is not a cynical comment by a political commentator on the Indian government. It is a factual interpretation of the state of affairs about the United States government nowadays. The reason for the same is benumbing as much as baffling - we are actually facing the once unthinkable prospect of the US defaulting on its debt obligations. Naturally, this prospect raises fundamental questions. How could the world's sole superpower run the risk of defaulting on its debt obligations? Is the US government heavily dependent on debt to fund its deficits? 

“The government is on daily wages.”

                                                                                       

Can he save it?

The United States debt ceiling crisis is a financial crisis in 2011that started as a debate in the United States Congress about increasing the debt ceiling and finally resulted in the downgrading of long term credit rating of US government from AAA to AA+, giving the US economy a negative look.                                                                                                    


Under US law, the United States Department of the Treasury cannot incur debt beyond the debt ceiling set by Congress. A failure to raise the debt ceiling would result in the government being unable to fund the spending which it is by law required to do, and which had been previously authorized by Congress. In addition, the Obama administration stated that, without this increase, the US would enter sovereign default, thereby creating an international crisis in the financial markets. And this is exactly what has happened this year!

The year 2011 started on a good note for markets globally; however the trend could not be sustained for long due to the recurring uncertainties that has enveloped the global environment. The final blow came in the form of downgrading of US long-term sovereign credit rating from AAA to AA+ by Standard’s and Poor’s (S&P) ratings agency on 5 August 2011.This led to an adverse reaction among the market participants as all the major global indices ended in red. What followed was a series of chain reactions in economies around the world that left the people worried.                                                                                                                                                  


The bloodbath on the street along with the correction that followed in the next couple of days, created a panic among retail investors. Consequently, investors who joined the herd started selling their existing portfolios without even giving a second thought to the benefits of staying invested for the long term. Major stock indexes such as NASDAQ, DOW JONES, SENSEX, NYX etc. dropped substantially as the market became very volatile. The prices of crude oil reduced significantly which affected the inflation rate of many countries. Markets grew more anxious over the government stalemate. Gold prices jumped. Bond prices rose as the gloomier economic outlook overwhelmed angst about default. But short-term money markets where banks do business with each other showed signs of strain. And most importantly questions started rising on the credibility of US dollar as the world’s reserve currency. The popular and now almost cliched statement that when US sneezes, the whole world catches cold, only gets proved true time and again!

So the inevitable question that arises is, “What is wrong with America?” Why is America’s political leadership unable to resolve something that previously had been nothing more than a routine procedure, carried out innumerable times under both Republican and Democratic presidents? The answer to this question is that America’s economy is at near-recession levels, with slow growth prospects and enormous unemployment. With more than 14 million Americans without jobs, and many with little prospect of work in the months to come, it is not surprising that the U.S. economy is hardly growing.



“You cannot spend more than (what) you earn…you should not borrow more than (what) you can afford.”

This, according to an editorial published by the American newspaper, may be the lesson Americans are now learning the hard way. Americans want prosperity-at-any-price, peace-at-any-price and then get-rich-quickly. They don’t believe in saving for the future but making life bigger and larger by buying things they can’t afford and relying on instalment payments. But what they forget is that credit buying is much like being drunk.  The buzz happens immediately and gives you a high.... The excruciating hangover comes the day after!


But the situation has got some rosy prospects for economies like India.  The downward movement in the Indian market is a very short-term knee-jerk reaction. Markets like India, which are well-regulated with good economic growth prospects and large number of companies, will certainly be preferred by the Foreign Institutional Investors, thus taking the sensex much higher.

All is not lost yet.

 Even the word “crisis” written in Chinese consists of two characters - one represents danger and the other represents opportunity. This is the time to take some practical and long sighted actions to give a push to the US economy. The fastest and best cure to America’s debt and deficit problems is strengthening the economy with more jobs, more consumption of goods and services, and more tax revenue for the U.S. Treasury. Other economies need to keep their market sufficiently liquid and promote monetary policies that will keep a check on the growth rate of the economy. Let’s try not to leave our children with a long legacy of national debt. Let’s just hope that US recovers from the bad phase soon otherwise it would lead to a self inflicted financial crisis potentially more severe than the one from which the world is now recovering from.