GLOBAL MUMBO JUMBO

While I prefer and rather enjoy writing on local happenings, I can’t help but join the rest of the world in gazing at the biggest markets, The United States of America and European Union, as they struggle with debt. Euro zone countries are battling with collapsing economies and debt ridden states while the US is in denial of a $14 trillion debt of which is in need of debt ceiling revision, otherwise, the US economy will face severe shocks pulling the global financial markets with it.

The EU is experiencing a situation of uncontrollable debt crisis; we have seen countries like Greece, Portugal, Ireland, Spain, all in huge debt and now Italy with one of the world's highest levels of public debt - at around 120% of gross domestic product, second only to Greece in the euro zone.

The US’s debt ceiling is ever changing, ranging from 60% as a percentage of GDP during Bill Clinton’s second term to 80% during George Bush’s term and now reaching a 100% of GDP. The US has a debt ceiling law which allows Congress to increase or lower the debt limit. The US is in this situation because the government spends more (than it receives) on bailouts, medicare, military supply, and social welfare and receives fewer taxes than can be attained. ‘The public debt is the people’s money, and today, the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.’ Ellen Brown, on the current situation of the US.
As per Wednesday 13/07/11, there was a deadlock on how the US would reduce its debt, there are basically 2 positions; 1. Punish the poor and save the rich or 2. Punish the rich and save the poor. It’s very clear that both wings need to come to a compromise to deal with this issue. In the mean time, we analyze potential problems facing the US and the rest of the world should a compromise not be reached soon.

If no agreement is reached, If the government subsequently admitted that it would be unable to meet some of its obligations, then confidence in the United States would evaporate overnight (the US losing its triple-A rating, leading to a massive crash in the dollar, dramatically higher interest rates (due to a loss of creditworthiness) and a crash in equities markets. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. Further, the US government will effectively start to run out of money to pay civil servants, government contractors, pensioners or holders of government debt.

The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago. Lest we all forget the challenges brought forth by the crisis, but in case you forgot; most notable to us in Botswana is the tightening of consumer spending on luxuries, decline in diamond revenues and subsequently government revenues. Our economy is government driven and any cuts in government spending we have seen cause a big uproar from the civil servants and of course our local economy-tenderpreneurs suffer the most.

The debt ceiling is simply a cap on how much money the government can owe both locally and internationally. For instance, debt ceiling for Botswana is 20% of GDP, and currently we are around 18% and we know of  government efforts in trying to reduce the deficit by not only increasing revenues but by reducing government spending. Money is an inflow and outflow of debits and credits, the liabilities of the government are the assets of the private economy; the national debt is what backs the money supply. While this may be, we should be careful not to let it get out of control; many lessons are to be learnt from the ‘superpower’ economies.