From what I’ve read it looks like America going default is inevitable, and if that happens then this would be the first time in History that the United States would be defaulting. Barack Obama has still not been successful at raising the debt ceiling, where its current limit is $14.3 trillion. A default would come if the U.S actually fails to fulfill its financial obligation(i.e, to payback its creditors) including repaying a loan or interest on that loan.
Now the U.S apart from paying its debt also has other obligations, which includes Social Security and Medicare (a health insurance program for the elderly), payments to federal employees, pension payments, spendings on Wars; which includes both direct and proxy wars and a lot of other financial commitments. Now the problem it faces is, where and how do you borrow more money?
The first option is capitulation: President Obama could meet the concessions demanded by the Republicans and agree to bigger spending cuts, tax breaks for high earners and a partial repeal of his healthcare reforms.
But the president rejected a Republican proposal to temporarily lift the debt limit, arguing that it would leave the underlying problem unresolved and lead to a repeat of the current crisis in six months.
“That is no way to run the greatest country on Earth. It is a dangerous game we’ve never played before, and we can’t afford to play it now. Not when the jobs and livelihoods of so many families are at stake,” he said.
The second option is to buy time and take the offer of a reprieve in payments for up to six months, which means a new deadline in the run-up to the 2012 Presidential elections.
But if there is no deal reached on these options, then according to US treasury secretary Timothy Geithner the effect the default would have will be “catastrophic.”
Geithner writes, “Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments — reducing investment and job creation throughout the economy,” Geithner said in a letter to U.S senator Michael Bennet, a Colorado Democrat. Failing to raise the $14.29 trillion debt ceiling would “force the United States to default” on obligations such as payments to service members, citizens, investors and businesses, Geithner wrote. “This would be an unprecedented event in American history. A default would inflict catastrophic, far- reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”
Will it affect the world economy?
Of course it will. The US has long been the global standard for financial stability and creditworthiness, now when such an economy defaults, there would be worldwide financial panic like the one in 2008, it will plunge the U.S economy even further which is still suffering from high joblessness and a battered housing market and will eventually put it back into recession. And this recession will have its affect all over the world. And if the U.S fails at restructuring its debt, then probably we would be looking at another Bretton Woods system, which came into existence to rebuild the international economic system as World War II was still raging.
Thanks for writing a concise summary about this; I’ve been asking my brother who’s done Finance and he’s been using very specialized vocabulary and all the fiscal jargon out there to explain this to someone like me who’s very ignorant on topics such as these. What do you mean by financial panic though? This was something he mentioned, but I didn’t manage to get it :/ Sorry I sound very dense
When people loose confidence in the financial system, causing widespread attempts to sell stocks and bonds and withdraw funds from banks, often stimulated(emotionally aroused) by a large financial entity (speculator, bank, etc.) making a large loss and defaulting on commitments, that becomes a financial panic.
Now Imagine if countries had the Islamic Sharia System implemented instead of man made laws, do you think there would have been any such problems? Absolutely not. Because the basis on which the modern day economy is based is on the system of Riba (Interest), and this is not just the United States, it’s through out the world. There is no land where Riba has not made in roads into the every day lives of Human beings.
Allah, the Most High, has strictly prohibited riba. Yet the world today, including the Muslim world, is saturated with riba. This has confirmed the ominous prophecy of Prophet Muhammad (s) who prophesied, in a hadith received from Abu Hurairah (ra):
I would recommend you read the book, ‘The Gold Dinar and Silver Dirham: Islam and the future of Money’ by Dr. Imran N. Hosein, a concise and jargon-free book to understand the modern day financial system through an Islamic perspective. Here is the link to it: http://www.imranhosein.org/media/books/dinarbook.pdf