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US Debt Ceiling: Mum, I’m Confused

Posted on the 27 July 2011 by Periscope @periscopepost

US Debt Ceiling: Mum, I’m confused

Money, money, money. Photocredit: Chensformers

August 2nd is fast approaching: the date on which the United States of America must vote on raising the US debt ceiling. Republicans and Democrats are fighting hard about a solution, with Democrats wishing to raise the ceiling immediately, and Republicans favouring a two-step approach, accompanied by massive cuts to services. Meanwhile, investors are betting on a credit default; and some people just don’t get it at all.

  • Chance of a deal?“A glimmer of hope emerged on Tuesday”, reported Reuters.  The American public, and its corporations, are growing nervous: a compromise needs to be reached between Republicans and Democrats. Now “similarities between rival deficit reduction plans appeared to offer some chance of a deal”. Whilst investors are uneasy, “there was no sign of panic as markets held out hope the logjam could still be broken.”
  • Betting on default. “A small camp of investors”, reported Annalyn Censky on, “are betting that the US government will default on its debt, and they’re putting $4.8 billion of their chips on the table.” But will they “come away with the winnings of a lifetime? Probably not, experts say.” Definitions of default under these Credit Default Swap contracts differ from those of the rating agencies; under a CDS, a default only happens if the US ”were to stop paying principal and interest to its bondholders, refuse to acknowledge its bond contracts or restructure its debt.” And even then, “CDS holders would still have to jump through hoops to get paid.” And if a default actually happened, the banks paying out money would be dealing with massive problems of their own.
  • Sisyphean task. The central question, said Jim Kuhnhenn on Associated Press, is just how long should the new borrowing authority last? Obama wants a $2.4 trillion raise to the ceiling, which works out at a 17-month extension. “But what’s the magic in that?” There have often been shorter periods. Republicans want a two-step process: first a six-month increase of $900 billion accompanied by cuts in day-to-day spending which amount to more than that; then, after a joint committee to identify deficit reduction measures of $1.8 trillion, a longer one with a debt ceiling increase of $1.6 trillion. Whilst Obama opposes this, saying that the plan “would force us to once again face the threat of default,” Kuhnhenn writes that debt ceiling increases are “by definition temporary.” The ceiling’s been raised 13 times since 1993. The nub for Obama is the welfare reforms required: a “Sisyphean task” which would push the debt crisis to near default again in January.
  • Where’s Dad? “Mum, I’m confused,” wrote Tim Harford in a satirical sketch for The Financial Times, in which a mother and father discuss their household spending plans with their questioning son. “You and Dad knew what your income was going to be and you agreed all the spending. So, basically, you agreed spending that would guarantee that you’d break through the debt ceiling. So you’ve agreed to exceed the debt ceiling.”  “Yes,” replies the mother, “we agreed to exceed the debt ceiling. But we haven’t agreed to raise it. That’s the problem.” The son’s answer is familiar to all: “But that doesn’t make any sense!”, he cries, claiming that the bank manager “should be more nervous that you don’t have a job and that you and Dad are spending far more than you earn, than about some entirely arbitrary debt ceiling that the two of you can agree to waive at any moment?” The mother concedes that this may be right. The final speeches say it all: “Where is Dad, anyway?” asks the son. “I think he’s buying himself a treat to relieve the stress.”

Luckily for you, we have plenty more on the US debt ceiling, and the economy in general:

  • US debt ceiling talks in gridlock
  • No end in sight in debt ceiling default
  • US in danger of credit downgradingUK GDP growth slows

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