Anytime between the the 3rd and the 10th of August this year, 2011, the government of the United States of America may run out of money. The estimates vary depending on who is doing the reckoning — the White House, Wall Street hacks — but either way, as with most things associated with going broke whether it be a person or an entire country, the outcomes won’t be nice. Bills won’t be paid, people will suffer, and confidence will be lost. The first two are the more obvious consequences. The US government’s obligations to its people in the form of state benefits like social security and healthcare commitments won’t be met. Businesses doing business with the government will be left unpaid. The livelihoods of people will be placed in jeopardy as the US economy’s biggest employers begin to struggle to make payrolls.
The less obvious but likely more far-reaching of the effects would be the third — erosion of confidence in the American Way. This confidence is measured by America’s credit rating, issued by a handful of influential credit-rating agencies — Standards and Poors, Moody’s Investors Service, etc. A downgrade of what is currently the “triple A” (AAA) rating (representing the highest level of confidence given to an economic entity’s ability to meet its financial obligations) enjoyed by the United States will mean a downgrade in the US’s perceived ability to pay its debts.
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When a country’s perception to creditors is compromised, creditors react by compensating themselves for the heightened risk of lending money to that country. Usually this compensation comes in the form of their charging a higher interest rate to that country (or any economic entity associated with it) for money lent to it. The aggregate effect is a rippling of this increased debt burden across the financial system of that country — all the way to the end-consumer whose obligations to pay credit cards, auto loans, home loans, etc. will grow and eat into their disposable income.
That spells trouble for Filipinos who are dependent on remittances from their relatives living in the United States. The increased financial burden will reduce Filipino-American families’ predisposition to send money to their impoverished relatives back home. The crisis of confidence in the American economy will erode the value of the greenback further. This means that whatever money Fil-Ams do send will be worth less.
So how exactly does the world’s mightiest nation run out of money?
The United States operates in deficit. That is, the money it collects in the form of taxes (among other sources of income) is less than the money it owes to suppliers, its citizens, its employees, and the banks from which it borrowed money. The gap between how much money flows into its coffers and how much needs to come out of it is the “size” of this deficit. What is the size of the US’s deficit? Big. The cash inflow of the United States government is short of its outflows by about (most likely more than) one trillion dollars every year.
So how then does it normally close this gap (i.e., pay for that $1 trillion after it had used up all of the money it had)?
The United States Government borrows money to use to fill that gap. And it borrows at least that amount every year, because this shortage of money — this deficit — happens every year.
Therefore, for so long as money coming into the US Treasury is less than money that needs to come out of it, the US government will keep on borrowing and its debt will keep on growing. The US government sets limits (a debt ceiling) on how much debt it plans to take on, and only Congress can act to change this. In 2000 the debt ceiling of the US government was pegged at $6 trillion. Today it stands at $14 trillion — an astounding increase over the last decade.
Calls to lift the ceiling yet again to stave off default are being hindered by a Republican-controlled House of Representatives who made that prospect conditional on evidence of some sort of plan to reduce the annual deficit, say, by cuts in spending.
The short of it is that this “crisis” in the US is political in nature — a deadlocked Congress, and a last-ditch rush among legislators and White House execs to reach a compromise involving, among other things, legislation and measures to meet the conditions set by the Republicans and finding ways to prioritise disbursement of the remaining funds in ways that could at least mitigate the effects of a default. In any case, politics is getting in the way and contributing to a further diminishing of the image of America as a beacon of stability.
Whatever happens in the political arena, the underlying and systemic issues surrounding how the US got to this point will remain; and the simple question — How exactly does the world’s mightiest nation run out of money? — though answered in this article and in many other ways by others, will remain one that may never be addressed convincingly.
benign0 is the Webmaster of GetRealPhilippines.com.