US: “Eat Your Peas” or Default!

Three weeks to go until the August 2 debt ceiling deadline! The U.S. government better get its act together and do something about their debt soon, or they run the risk of falling into default.

During a press conference this week, President Obama expressed his concern about the approaching deadline for raising the debt ceiling as he urged U.S. lawmakers to stop squabbling. He suggested that they reach a compromise by both raising the legal borrowing limit and slashing the government deficit at the same time.

You see, the Republicans and the Democrats aren’t seeing eye to eye when it comes to trimming the huge U.S. deficit. On the one hand, Republicans refuse to raise the debt ceiling unless there are accompanying spending cuts. On the other hand, Democrats are uneasy about implementing belt-tightening measures and would rather focus on increasing tax revenue instead.

Can they reach an agreement within the next three weeks? Obama seems intent on making the Republicans and Democrats come to terms since he plans to keep convening the party leaders every single day until they strike a deal. As he put it, it’s time to “pull off the Band-aid” and “eat our peas,” referring to something that must be done even though it’s tough.

If you have been keeping up with my updates, you’d know that I wrote an article about the U.S. debt ceiling before. But for the benefit of the new readers, I’ll do a quick update.

About three weeks ago, credit rating agency Fitch threatened the U.S. that it would put the country’s sovereign debt rating on negative watch if the government fails to adjust their debt ceiling come August 2.

Tim Geithner shared Fitch’s sentiments. According to Geithner, the Congress must pass a new debt ceiling to prevent the U.S. from possibly defaulting on its debt. At that point in time, the government’s borrowing limit was already at a whopping 14.3 trillion (yes trillion, that’s not a mistake) U.S. dollars. The U.S. Treasury wanted another 2 trillion dollar increase.

“But Forex Gump, you keep talking about all this debt… What has it got to do with the forex market?”

Ah, good question young padawan.

A U.S. default would basically put the economy back into negative growth (and eventually recession). It would also create a wide-reaching case of fear in the global financial markets and result in huge losses in the stock markets with unwanted consequences. The U.S. is such a big country that a default would undermine the entire financial system.

Ironically, a default could actually be beneficial for the U.S. dollar as risk aversion leads to safe-haven buying. In fact, a quick look at the charts would indicate that these debt concerns (in combination of other global problems, of course) have already influenced safe-haven flows as early as now! Do you think this safe-haven rally could last or will the U.S. find a quick fix for its debt problems?


  • Ilya Gruntal

    As you probably already heard many times, U.S. default is unevitable.
    Yes, they raise the debt, yes, they produce even more debt papers – obligations. But who will buy it? When we see negative statistics, worldwidu tye problems and struggling overall, i doubt that anyone will actually buy new 2 trillions of stupid americans debts for the sake of their blessings.

    After all, even with the debt raised nothing actually can be done, since it’s another long-term bubble, and we live to observe it’s pop.

    2013 U.S. Default deadline. Nothing can be done, so we’d better get ready right now, think ahead what is better to get in our basements – food, water, weapon&bullets or gold and american dollars. What u think?

    • Cillian Murphy

      Short term (i.e. 2013 or sooner) I’d find it difficult to see a default occurring as yields on US paper are still low compared to anything in the Eurozone where there is a “real” risk of default. There is obviously still a market willing to buy.

      If the US can’t sort out its spending and tax incomes in the longer term, who knows what could happen? But like Jack says: “On a long enough timeline, the survival rate for everyone drops to zero”