USA Debt Ceiling

By Jason Fittler

At present the US is back in a situation where their debt ceiling needs to be increased.

The current debt ceiling is $16.7 Trillion, back in 1990 it was $3 Trillion by 2000 it was $6 trillion and by 2010 it was at $14.3 Trillion.

Since 1913 the US government has had to approve the debt ceiling. The debt ceiling is the amount up to which the US government can borrow.

Why this is a big issue? The US needs to borrow money to continue to pay for its reforms along with interest on current debt and all current government expenditure.

The Republican’s in the US see this as an opportunity to bring about spending reforms by cutting back on government expenditure, which they consider wasteful. The president however has a number of social reforms which he want to go through as such we have a stale mate.

The key date here is 17/10/2013, at which point the government will start to default on their debt obligations. To put this in terms the ordinary Australian can understand, it is like going back to the bank to borrow money to pay for expenses you have committed to but do not have the money to pay and the bank tells you no.

It could however simply be a storm in a tea cup as not to increase the debt ceiling will cause severe economic pain in the US as services need to start being cut. As such it is widely expected that an agreement will be reached around this date.

But this leads me to the bigger picture.

The US has been using Monterey policy to prop up their economy since the GFC. This activity has been undertaken by the Fed Reserve. The market has been speculating for some time as to when this process will slow or cease.

Back in April 2013 the chairman Ben Bernanke announced that they were considering slowing down Monterey policy, the market started to drop. It was not until May when the chairman corrected his April statements that the markets started to move up again.

The market is expected to fall once again when Monterey policy easing starts, the problem is no one knows when this will happen.

The current debt ceiling crisis for me is an indication that the government in the US need to change spending habits which leads into easing of monetary policy. I do not expect that this will happen in the short-term but if there is a ground zero I think this might be it.

Australia is not isolated on this issue, we also have a debt ceiling problem, which has been well flagged. Our current ceiling of $300 billion is also to be moved up to $350 billion shortly however I doubt we will have the same media coverage as the US. The new government has advised that this will be a short-term increase.

Australia I feel is ahead of the US as far as economic recovery. Our new government is clear that they will cut spending and focus on infrastructure spending which will in turn provide more jobs and build long-term efficiencies for our country.

The road back to surplus will be at least two terms of government but at least we are on the right road. The US is yet to make these changes but I expect it will happen at the next election.

I expect that the Australian market will pull back with the US; mainly due to international investors generally looking to exit all markets while the US get reset.

This would be short-term and provide a good opportunity to get spare cash into our market, which is looking a little fully valued at present.