28 July 2011

Debt and Scary Americans

The thing that scares me about the current American debt ceiling crisis is Americans!

A bit of background:
- If American politicans do not agree to a raised government debt ceiling by 2nd August then world financial markets are likely to be upset (quite apart from the American public sector)

- Early in the 20th century, every issue of debt (including its purpose) needed to be approved by politicians, but this has gradually been eased, so that now only the overall debt ceiling is set

- The debt ceiling has been rising massively over the years, and one day will have to come home to roost (but politicians only have short term interests, of course)

- Debt issues are basically Treasury Bonds which investors buy (the equivalent of UK Government Gilts), effectively giving a loan to the Government which must be repaid at some point. Issuing even more debt at that point to the next investor is one way of repaying it. (A giant Ponzi scheme?)

The trouble is that Americans can be an insular lot. Only 37% have passports (State Dept, Jan 2011). And most would not be aware of the impact of their politics on their financial world, let alone on the global financial world.

And while there are certainly people in the US who know what they are doing with the national finances, because the political masters have to listen to the public, that does tend to limit their room for action.

Continually increasing the debt ceiling is not sustainable. But there has to be a better way of dealing with it than holding the world to ransom at the 11th hour.

On the other hand, perhaps Americans are better placed to hold the global financial world to ransom than the Chinese. Only 1.7% of them have a passport. Then again, the Chinese government doesn't need to listen to its people, so perhaps that's irrelevant!

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