Obama's debt: Could it be apocalyptic?

Earlier this year, fundamentalist Christian Harold Camping predicted the rapture would occur on the 21st May, later revising his prediction to 21st October as the day came and went. However his date for the apocalypse was 2 months too early: he should have set our watches for August 2nd. If you have switched on the news over the last few days, you will have seen the intense political battle in the United States, over what's known as the “Debt ceiling”. But what exactly is this argument about and why should you care about it?

Well, to start at the most basic level, countries like individuals are able to borrow money to finance spending. A government debt is held in the form of “bonds”, and the government sells these bonds on a market, promising to pay a level of interest over a set period of time, after which they repay the money to the person or company who owns that bond. If you're grandmother is anything like mine, you may have been given “premium bonds” as an eighteenth birthday present, where you loan the government money and in return they give you the chance each month to win cash prizes.

Each country then has to decide how much it wants to borrow, or more precisely, how many bonds they want to sell. In America, this is set out in law by Congress (similar to the UK's Parliament) every so often and at the moment the US Treasury (the bank of the US Government) are permitted to sell $14.3 trillion worth of government bonds. To put that figure in perspective, someone turning 60 years old today would have to have borrowed over $650 million every day of their life in order to rack up that amount of debt – it is no insubstantial amount of money. It's over $7,500 dollars per second, every day of their life.

Usually, when America needs to borrow more than the amount Congress permits, lawmakers simply change the law so that the government can go on spending. However, things are far from usual at the moment. President Obama is from the Democrat Party, the left wing party of American politics and in 2010 passed an historic bill to massively expand healthcare protection towards the levels we take for granted in the UK.

For those on the right of American politics, mostly associated with the Republican Party this was indicative of the problem in the US Economy: too much spending by the government. Incensed by what they thought was the government needlessly wasting individuals hard-earned money, they set up a powerful political movement largely within the Republican Party known as the “Tea Party”, whilst not a political party, their name refers back to the protests against British taxes in America in 1773 where tonnes of imported English tea was thrown into Boston Harbour.

Therefore as the amount of debt required by the Obama government to continue planned spending got closer and closer to the $14.3 trillion dollar debt ceiling, those in the Tea Party movement smelt blood. Because of the nature of US politics, the Obama government does not make the laws, it simply implements them. With half of Congress controlled by the Republicans, they are able to block any move to increase the debt ceiling and refuse to authorise any more borrowing in an attempt to get the US to drastically cut its spending.

The plan put forward by Republican leader John Boehner, in exchange for raising the debt ceiling would have cut US spending by $900 billion, cuts of almost a third making George Osborne’s budget look positively generous. They also fiercely oppose any increase in taxation, which is supported by their rival Democrat party and want the government to be allowed only to spend as much as it takes in. However, neither side has managed to come to a deal with the other and if this stalemate continues until August 2nd, then suddenly the US government won't be able to borrow any more money as they will have hit the ceiling.

So what happens then? Well if the date comes and the ceiling has not been raised then President Obama is left with only two choices. The first is to start prioritising which payments the government makes; currently only 60% of US spending is financed by taxation with 40% coming from debt. Therefore the Obama administration would have to find a way of delaying 40% of their expenditure, by cutting back on the healthcare reforms and delaying the payment of benefits, which leaves the government open to significant legal challenges by those entitled to benefits.

The other option is however even more scary, the possibility that the US defaults on its payments. This works in a very similar way to your credit card. You are required to pay off a certain amount each month, if you simply don't have the money to however you can default and not pay but this comes with severe penalties and a downgrading of your credit score. In a similar way, if the Obama administration is unable to continue paying the interest on the bonds its issued, then it faces catastrophic problems, with its perfect “triple A” credit rating lost.

And this isn't just a risk for America, everyone right across the world will be hit by it. If you need evidence, look at the 2008 economic crisis. It wasn't problems in England, Britain or even Europe which caused the recession, it was a collapse in confidence in the US financial market. A default on debt by the US government would do exactly the same thing, plunging scores of countries back into recession.

At the moment, the US politicians are playing brinkmanship, hoping the other side blinks first and gives into their demands. However, the debate has become so heated, with even former Republican Presidential candidate John McCain describing Tea Party politicians as “hobbits”, that politicians across the pond risk putting politics ahead of the financial security of the global economy. The stakes really are that high. Whilst predictions of the rapture may have seemed fanciful, all financial analysts expected to see Satan's winged demons before they saw the US default on its loans for today, that is the real Apocalypse to worry about.

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