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You are here:Home>>Strategic Research & Analysis>>US: Averting economic woes by raising debt limit
Friday, 29 July 2011 16:46

US: Averting economic woes by raising debt limit

Written by Emeka Chiakwelu
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Default may have economic domino effect on Africa, emerging economies and US trading partners

Echoing the words of the late President J. .F Kennedy, "We will go to the moon and do other things, NOT because they are easy but because they are HARD." In a nutshell that is what raising United States debt limit is all about, if it was an easy issue there will be no need for the politicians to be scrambling for more favorable positions. It may not be as difficult as going to the moon but it may require same willpower.

The economic impact of not raising debt ceiling and subsequent default by United States may have domino effect on Nigeria and Africa as a result of AGOA and NEPAD. Most African countries have their reserve in US dollar which may depreciate in value if United States's AAA credit rating is downgraded. Many African countries receive foreign assitatnce from United States which may be slashed or be cut off when economic hardship continues in America. The key aspect of this is that America is a major trading partners to Nigeria and South Africa in particular and Africa in general.

The elected politicians of both Republican and Democrat parties can politicized the issue of debt limit from Washington to Timberakutu, but the reality is that there is no easy solution. One thing for sure, debt limit will be raised and failing to so come with untold hardship that will shake American economic foundation. Another thing is not just raising the debt limit but there is also a time factor. It is must be raised at the due time which was said to be August 2.

There is time and place for politics but this one in particular is not for it. Hey, no one can blame the politicians for not trying but it is time for them to quit dancing around and sit down and do the business of the people. Politicians are looking back at their constituencies and home base to determine what and how to negotiate. That is all good and dandy to seek support from your base, but in finality an elected politician be it the president or the speaker must make the tough decision. That is why they were elected in the first place to represent the people and make decision that is good for the country.

Economic consequences

The die is cast and the Federal debt limit must be raised at the allotted time and failing to do so will come with economic ramification that will thicken economic hardship for the American people. Both the Wall Street and Main Street will not escape the economic woes that results due to the failure to raise the debt limit. Even the political elites – the elected politicians in Washington DC will not escape the frustration of the American people when they failed to deliver on debt limit. The voting public will definitely start once again with a clean slate by throwing away most politicians in 2012 election.

American greatest economic asset is the confidence that global economic players have in it. Investors are always trusting in putting their scarce resources in America by buying T bills and bonds knowing quite well that it will be redeem at the due time. Therefore when United States defaults on their financial obligations by not servicing and paying interest on their debt that will be a great disappointment, a big blow and the end of trust.People have come to take this for granted the confidence they and rest of the world have in US economy. But this confidence was not built in day; it takes years of accumulated hard work and sacrifices by great men and women of this country, framers, leaders and hard working tax payers who endeavor assiduously to solidify and consolidate this confidence and trust.

United States economic wellbeing might be at stake when Moody Rating and Standard & Poors’ downgrade the credit rating of the country if United States defaults. The AAA rating US has enjoyed since 1917 that justify American Super power economy may be downgraded. What it actually means that it be more difficult for American government to borrow money. In this case to borrow money the United States has to induce prospective buyers of treasury bills and bonds with higher interest rates. The greatest peril with such a scenario is that US cannot afford to pay higher interest rates on debts because they do not have the money and with $14 trillion debt, the debt servicing will take a big chunk of the budget expenditure. That in turn will threaten the welfare programs provided by the government. The American people will be faced with shift austerity measures as a result of downgrading of the credit rating. Subsequently, most of the programs offered by the government will be terminated or greatly slashed and cut down drastically.The government will resort and compel the Federal Reserve Bank to print more money and that is a fertile ground for higher inflation.

Inflation looms

The greatest disaster that will come with the inability for the government to raise the federal debt limit will be a rising inflation resulting from printing of paper currency (dollars) in order for the government to meet its financial obligations. The making of higher inflation with lower credit rating will make life difficult for American people as it comes with higher unemployment, higher interest rates on credit cards and depreciation of standard of living.

Momentarily, the heat of inflation is beginning to show is ugly face gradually. But when the raising of debt limit falls apart, the surging inflation will make life difficult because dollar will worth less for domestic consumption. In this case employers will let go of more workers as result of economic slowdown and households with fixed incomes will not meet up paying their bills and providing for their loved ones. Economists are predicting a fresh recession not just double dip. All the gains made by this administration will fall apart and economic suffering will mightily increased.

Compromise is the Answer

In actuality lifting the debt ceiling is more of a fiscal problem than political but it needs political management. The executive and legislative arms of the government must do something real fast and come to some sort of agreement. There should be a meeting of the minds and there must be the ‘c’ word which is compromise.

 

President Obama and Speaker Boehner playing golf

 

President Obama and Speaker Boehner must find a common ground to strike a deal in order to avert the ramification that will come with the inability to raise the debt limit. This is a serious business and compromise is the answer. Politicians from both parties must be willing to leave their comfort zones and loosen their ideological nets to make the great compromise and save the day.

Emeka Chiakwelu is the Principal Policy Strategist at Afripol. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa. www.afripol.org This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

Last modified on Sunday, 14 August 2011 00:07

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