June 9, 2011. Beijing. A high-ranking advisor to the People’s Bank of China warned US lawmakers yesterday to get their act together and find a way to come up with the money America owes. The harsh, almost threatening tone, was intended to specifically warn Washington not to even think about missing an upcoming interest payment on debts it owes. The United States currently owes China over $1 trillion dollars.
Li Daokui of the People’s Bank of China told reporters yesterday, “I think there is a risk that the US debt default may happen. The result will be very serious and I really hope that they would stop playing with fire.” Daokui stressed his point further when he re-emphasized his concerns, “I really worry about the risks of a US debt default, which I think may lead to a decline in the dollar's value,".
What is happening on Capital Hill this month is being called a political game of chicken between progressive Democrats led by the Obama White House and debt-busting Republicans led by the Speaker of the House. Suddenly the topic of conversation of governments and financial experts the world over, the crisis simply comes down to whether or not the GOP will allow the President and Democratic leaders to raise the nations ‘debt ceiling’ yet again.
The ‘debt ceiling’ was initially introduced to protect the American people from going into too much debt. Ideally, if the nation were to ever reach that limit, it would create warnings and red flags indicating something was horribly wrong with America’s finances. The problem is, America hits that imaginary ceiling time and again, year after year. Each time, whichever Party is in power, a bi-partisan effort pushes through a new debt ceiling, higher than the one before.
This year however, with the officially recognized national debt hitting over $14 trillion dollars, fiscally conservative Republicans have said enough is enough. Empowered by Tea Party activists and even members of the President’s own Party, the GOP has chosen this issue as their defining moment, even if it causes a catastrophic world-wide economic catastrophe. For that’s exactly what government leaders and economists the world over are promising if the US misses its next debt payment to China.
With President Obama demanding the debt ceiling be raised to allow America to borrow more money to pay the interest on the money we borrowed last time, and Republicans demanding the President sign-on to spending cuts to raise the money instead of borrowing it, the world is holding its breath to see who blinks first.
President Obama himself has admitted that missing the debt payment would result in “catastrophic” consequences that would push the American economy back into recession. August 2nd is the day the US will run out of money and borrowing power. Whether the President cuts his additional spending or the Republican leadership authorizes yet another increase in America’s borrowing limit, world leaders are less concerned about how the US comes up with the money it owes than they are about whether the US intends to come up with it at all.
According to quotes rounded up by Reuters, international leaders and financiers are none to happy about the possibility of a US default. In fact, most foreign representatives and market experts agree. The consequences of an American debt default are so horrible, the possibility of it happening are slim to none.
"It has dire implications for the economy at a time when the macro data is softening" said Ben Westmore of the National Australia Bank, "It's just a horrible idea”. Even the world’s debt markets didn’t appear nervous. Marc Ostwald, a strategist with Monument Securities in London, said markets were working on the assumption that the U.S. debt story "will go away". US Treasury prices were steady in the European market as trading came to a close Wednesday.
Others were even less worried. "How can the US be allowed to default?" said an official at India's Central Bank, "We don't think this is a possibility because this could then create huge panic globally". America owes India just under $40 billion. A Jordanian senior Central Bank official expressed concern, "Our economies are substantially tied up with the US financial developments".
US investment managers are taking a more realistic approach. "It just wouldn't happen" said Barry Evans of Manulife Asset Management, "They would pay their Treasury bills first instead of other bills. It's as simple as that". Possibly the most listened-to financial adviser, Bill Gross of Pimco and their $1.2 trillion dollars in managed assets, had a humorously cautious take in an interview with CNBC yesterday. Gross warned that missing a debt payment would have a ripple effect throughout the rest of the markets and send a “disastrous signal”. Pimco is less worried than other firms. They warned their investors months ago to beware of US Treasuries.
Chances are that either President Obama or Republican leaders will cave in. Or more than likely, a compromise will be reached where Democrats cut some spending and Republicans raise the debt ceiling to meet them half way. If that doesn’t happen by August 2nd however, the world may just see what financial Armageddon really looks like.