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Day of reckoning – Aug 2nd

July 26, 2011

 2nd of August is the date to look out for. This is when potentially the US begins to default on its debt and even before that, it risks having its credit rating downgraded.

Why should you care? Well a lot of economists and government officials prophecy global ripple effects that can push the world back towards a recession.

The possibility of a default stems from an invisible debt ceiling that exists in the US that prevents the government from raising its debt above a certain point without approval first. Due to the national debt being so high, an eye-popping 14 Trillion dollars, both political parties are seeking drastic proposals to cut down on the deficits and the overall debt to avoid a down-grade in the national credit rating. Yet as the deadline looms closer both parties are not coming to any agreement accusing each other of not being serious.

I think this news story brings to light a couple of issues:

Australia did fairly well in surviving the financial crises, yet there is still a sense of unease around the world as the number of countries that are facing the gun-barrel of economic woes is growing. Greece, Ireland, Spain, Portugal, Italy are a few that come to mind. Now the US, the high-roller with the dice in its hands is gambling with its finances. It leaves the rest of the world players including Australia looking-on with an anxious wait reviewing just how many chips there are on the board, hoping a default won’t give the feared snake-eyes roll of the dice.

Another observation that is clear is watching the politicians placing their own interests first in a political version of Maslow’s hierarchy. Each party wants to structure the debt solution in such a way as to guarantee their own re-election success. Other times the decisions are based on how much money the lobbyist groups will offer them. The interest in its own countries welfare is floating somewhere up higher on the pyramid. Same occurs here in Australia where individual politicians would support something that may be popular, yet if delivered at all, is without consideration of the whole budget or economy. Or if the politician supports or opposes something based not on how it will affect the country but rather how strong a lobbying organisation is and how deep their pockets are.

Anyhow, I have my popcorn out, and will continue watching the cinema event approach the climactic scene that may see the debt deal reached, and see US live another day or perhaps an unhappy ending that will leave us all hurting personally.



Credit rating downgrade

Proposals from both sides

Outcome of a possible default

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