The impasse of the US debt deal has driven the US stock lower today, with the NASDAQ down more than 2%. As the August deadline approaches, investors are worried that the US may not be able to borrow money legally and pay the bill on time. At this stage, I think our main concern should not only focus on whether US will be able to pay the bill this time but whether it can pay its bills in the future. Even if the politicians can reach an agreement before next Tuesday, I believe the US credit is affected.A major problem of the US political system is that administrations, theoretically, only need to take care of this country for eight years and leave all the crap to the descendent .The US debt ceiling has been increasing constantly since the 70s and every government simply left the debt problem to the next one. Even the US is still the world’s strongest power with the highest GDP number, eventually; it will be dried up by all the interests incurred by these debts. The question will eventually turns out to be: who is the lucky president in office when this happens?
Investors like China and Japan will eventually lose confidence in the US’s ability to pay back the US treasury and choose to diversify its asset allocation. When that happens, US will be in deep trouble. The cost of borrowing will be higher. This means that US will pay more interest on every dollar it borrows. The debt burden increases with the interest and thus a vicious spiral continues.
The solution is simple but politicians are just too selfish to make it happen. The US needs a spending cut, an austerity package like the ones in Europe. However, the reality is that government is in office for a maximum of eight years, nobody would like to risk losing popularity by cutting the social benefits and increasing personal income taxes at the same time. So if that is the case, a US default will eventually happen and people will suffer, I mean everyone.
We all know that American’s living standards are largely based on borrowed money, so someday we will pay it back, in an almost cruel way.
