Friday, July 29, 2011

America's debt ceiling

At the time of writing the American government still seems to be deadlocked on increasing the amount of money it's borrowing. For the most part the stalemate is being led by one particular faction, which I'm not going to bother naming. They don't want it to rise and hand out a homely little analogy about how if America was a family no-one would think this was sensible - 'Gosh we're in debt, let's apply for another credit card'.

Firstly like so much that comes out of this groups collective mouths it's rubbish and shows that they have no connection to families who actually do this... because it makes sense. A lot of credit card companies promote zero interest on balance transfers for a set period. So rather than have to pay off the capital and interest on your original credit card you transfer it and pay only the capital - you've reduced your debt.

The second point is that it's still rubbish because even their analogy doesn't work - this isn't about buying stuff this is America's mortgage. America's next mortgage payment is due, but are they going to pay it.

Putting it like that should also help with all the financial Armageddon talk that's going around. What happens if a family misses a mortgage payment? It depends on the family. If they're just having a small problem the bank may let it slide this once, they'll get a mark on their credit rating which means any future borrowing will be at a higher interest rate; but by and large they'll survive. Unless the banks are complete bastards or the family are untrustworthy; in which case they get kicked out.

Is America untrustworthy; do the holders of their debt want to 'kick them out'. I don't think so. If America fails in this instance it'll mean higher interest rates on borrowing due to their adverse credit rating and higher interest rates on borrowings that are banked by American debt; which will affect other countries including the UK.

Of course the bad thing will be if they miss a payment, financial collapse doesn't occur and this faction use that to justify their actions - 'Hey we missed last months payment and nothing totally bad happened; we can miss this months too'.


TheMiserableRanter said...
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TheMiserableRanter said...

The American political system is designed to benefit those few with the most money. We need to reform the way the process works, which is difficult because lobbyists and special interest groups have a lot more money than you and I.

National debt is very different than a personal debt in the way that you can run a deficit and still have a prosperous.
Some of America's most prosperous years were during a major deficit.

The truth is what stimulated economic growth and jobs is domestic spending. Much of our bloated budget is allocated overseas- so the economy never benefits from that money.

FlipC said...

Sadly the money=power is a logical conclusion. Who is a politician most likely to listen to - Joe Bloggs with his one vote or a person who provide the money so the politician can get their message to multiple voters?

Same goes for the media, court the bosses and they'll give the politician/Party a positive spin that reaches multiple voters.

In the UK we have a small amount of balance in that allowing Parties to present television broadcasts during a general election is mandatory rather than just to those who can afford it.

I did read a piece that pointed out the Keynesian view of borrow and spend during a recession, but control it during an upswing - essentially the opposite of what we in the UK have been doing. Though of course there are multiple other factors.