What if US failed to increase Debt Ceiling? (31 July 2011)

Deadline gets closer and closer, yet US have not come out a concrete solution to calm the world. Whether tax increases should be included in a deficit reduction agreement or not, both Democrats and Republicans are standing firm without compromise. Republicans insist that any deal to cut deficits should involve spending cuts only while Democrats have been demanding both spending cuts and tax increases.

Although Finance Malaysia reckons that the Congress would pass the bill to increase debt ceiling, let us analyzed and prepare for the unfortunate outcome. What if the debt ceiling limit is not raised by 2nd August?

1. US bondholders will get paid first, while other payments such as social security, military payment, and Medicare services will stall.
2. Downgrading by rating agencies is unavoidable, which will lead to an increase in Treasury's borrowing costs.
3. US will be losing its AAA ratings, damaging the important role of USD as one of the world's preferred currency.
4. USD will slump to yet another all-time low, while Gold price will recorded yet another all-time high
5. Commodities prices traded in USD will shoot up.
6. Inflation rate in Emerging Markets will pushed up by rising resources and food prices.
7. Hence, this will dampen the growth of the economy and China being the world's growth engine will stall by high inflation, lower domestic consumption.

It's such a nightmare for the world's economy. Anyway, Finance Malaysia thinks that both Democrats and Republicans will reach a solution and pass the debt limit increase. Ultimately, who is going to blamed for if US default? Both sides of politicians, not only Obama. The world is just not prepared for such unfortunate events while recovery is just started.