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US Debt Skyrockets, But Positive Outlook Prevails

Jul 23, 2011 5:13:37 PM - thesundayleader.lk

By Abdul H. Azeez

The total US debt is budgeted to increase from $11.9 trillion in 2009, to $13.8 Trillion in 2010, and $15.1 Trillion in 2011.But what does this signify? In countries like Greece, the slightest indication that the country may have difficulties in paying back its debts is enough to send investors running, and bond yields skyrocketing.

But the US, despite holding far larger amounts of debt is still safe. This is because investor confidence in the US is always high, and investor confidence is usually a self-fulfilling prophesy.

However, new developments in the US debt scene has made rating agencies start talking. But the odds are still spectacularly low. The Wall Street Journal reports that Analysts’ views of a Greek default ranges from at least 50 percent to about 90 percent. On the other side of the spectrum, most are saying the odds of a U.S. default are still close to 0 percent.

The 114.5 Trillion dollars is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Programme, social security, military and civil servant pensions. It is the money USA knows it will not have to pay all its bills.

US politicians are currently debating the debt ceiling issue. The maximum amount of borrowing that can be done is currently 14.3 Trillion dollars, but maintaining this is proving to be increasingly impractical. Republicans and Democrats are divided on the issue and there is fear that mass panic could be caused if the US misses a debt payment. Those calling for the increase in the debt ceiling want to avoid a lapse in payment and thereby avoid potential default.

Democrats want to increase the ceiling, but the Republicans aren’t giving way until significant cuts in deficits are guaranteed. The US economy, though running on its own steam now, is far from capable of making that deficit up by increased exports. Instead the only path open is the cutting of spending. Fears have risen that spending cuts on things like medicare will deny Americans from much needed basic services. And it is here that the deadlock has rested to date.

America has less than two weeks to agree a plan to raise its debt ceiling from the current maximum level, which was reached in May. The US Treasury predicts that the country will run out of resources to pay its bills on August 2, but some experts believe a deal must be reached by this Friday to allow time for legislation to be written, debated and approved.

An increase in the debt ceiling will reduce the immediate risk of default, but this will not help solve the underlying weaknesses in the US economy. Adding salt to the wound, ratings agency Standard and Poor warned this week that it might reduce America’s prized AAA rating even if a deal to raise the ceiling is reached. Adding strength to questions asking if Washington is capable of getting to grips with its ever rising debt.