Wake up call for the US

Last month we were all aware that the US debt level had surpassed its ceiling level of USD14.3 trillion; what does that look like in numbers?

$14,305,336,580,992.11

This level was previously set in congress and was thought to have been large enough to quell any problems in the US economy. Unfortunately on the 15th of April this level was breached and the US is showing no signs of being able to reduce this figure.

 

So what does this actually mean?

Imagine you have a house that you live in and are mortgaged to the hilt, your monthly payment is due at the start of the month, so you then borrow more money to cover the payment, then the next month’s payment is due and you have to do the same and so on!

It’s a vicious downward spiral in your confidence and in your lenders confidence and eventually you will have to think of other ways to afford your monthly repayments. In real terms, the lender ends up being the US tax payer, who already has issues with rising food prices because of inflationary pressures. The population of America is currently standing at 311,469,007 and a whopping 40 million Americans receive food stamps which is the equivalent to 1 in 8 people!

President Barak Obama met House Republicans this week to discuss the deficit and Mr. Obama and the treasury department warned Congress that if their ceiling was not increased they could risk default. S&P have also said in previous weeks that there is a 1 in 3 chance that America could be downgraded to “AA” in the next 2 years.

In my opinion, if the US defaults on its debt, we will see a minimum rise of at least 50 basis points in T-bills which should trigger a rise of at least 100 basis points on interest rates. The undercurrent of this could end up increasing the unemployment rate with another 600,000 people losing their jobs; the current jobless rate is hovering around the 9% mark.

House Speaker John Boehner told reporters outside the White House, following the meeting:

"If we're going to raise the debt limit, the spending cuts should exceed the increase in the debt limit, otherwise it will serve to cost us jobs in our country,"

"It's not what the American people want," he added.

In the vote, over two thirds of the voters voted against the increase in the deficit ceiling!

Mr. Obama will need to make it very clear to Congress what cuts he will be making and the way in which he will help raise the US GDP figures from 1.8%. In my opinion until he does this and until GDP figures strengthen, America will be in for a bumpy ride.

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