Monday, July 18, 2011

Federal spending has gone through the roof in the past decade given the extended conflicts in the middle east and the prolonged global recession. In fact, spending has gone so high that we are in danger of not being able to pay back our debts. We have about 15 days before the United States Federal government will default on its debt. That is, unless Congress agrees to raise the debt ceiling which gives us some time to start lowering our debt.

Defaulting on debt is a horrible process to go through and we're seeing Portugal, Greece, Ireland, and Spain having to undergo serious austerity cuts. When their governments defaulted, the recessions in their respective countries worsened and fueled more negative speculation in global markets. Not to downplay the importance of their economies, but Ireland was the only country experiencing significant growth prior to the recession.

If the United States defaults, the global economy will enter an extremely dire situation on several fronts.

1. No one will be able to bail them out----When Greece defaulted, the International Monetary Fund and the European Union combined to give them an initial bailout. A significant part of the money from the IMF side of the 110 billion euro bailout was funded by the US. The US economy is the largest as an individual country and much larger than Spain, Greece, Ireland, and Portugal combined so if the public debt and deficit percentage are too high, it would take a serious combined effort from the EU, China and India to give us some help but their economies would be too adversely affected from a US default that they would have to stretch their resources just to keep the global economy stable
2. The IMF and World Bank would lose serious legitimacy--- These two institutions are primarily responsible for creating a global banking reserve, but the United States was a chief contributor and should another crisis emerge elsewhere around the world, neither institution would gather enough cash to bail them out.
3. Commodities would have to find a new currency to trade in---The only apparently stable currency to trade different commodities is the Chinese Yuan (RMB). However, the Yuan is not too popular because it is currently pegged to the US$ and a default crisis would cause sever instability of the US$. The Yuan also suffers from inflation within China that is repressed in the statistics because of their fixed exchange rate. The Euro is currently in its own series of upswings and downswings due to their own continental crisis. The pound is not a good currency to trade in because it is such a powerful currency and not as involved as the US$, the Euro, or the Yuan. Not to mention, commodity prices will rapidly shoot up in the US and in other countries.
4. US trading partners will see a large downturn---This is a huge negative because a lot of developing nations export several goods to the US and some developed countries like Japan and Canada will see a drastic downturn in global demand for their goods because the US is their top foreign consumer. China's rapid growth rate will slow down significantly due to the lack of demand around the world and a loss of confidence in the global economy.
5. Foreign Aid will be setback several years--- Although foreign aid makes up a whopping 0.7% of US GDP, it's not their contributions alone that will be affected. The nations who actively provide aid will have to cut back on theirs just to stop their own debt after bailing the US out. As a result, potential conflict could break out and the democratic revolutions that have occurred this year could revert back to their previous oppressive dictatorships.

There are of course several other implications behind a US default but let's just hope that congress can come together one time to help us out. I'll publish a list of things the US should do to avoid having to raise the debt limit again and continuing the cycle.

No comments:

Post a Comment