No One Believes in an American Bankruptcy, but …

After Greece comes crisis time for the United States, which can become insolvent on August 2nd. The reason is the political fight between American politicians, which has completely defined the last week of July.

In the U.S., the president is responsible for the budget, but according to the Constitution, only Congress has the power to borrow money, without which the country can’t function. Congress executes this constitutional duty through a debt limit, which currently stands at $14.3 trillion.

This ceiling has been raised ten times within the past decade, the last time being in the spring of 2010. The current limit was already reached in May, and since that time, the White House could not borrow any new money. Thanks to the administration’s suspension of payment into pension funds, the Treasury has enough money to keep the U.S. solvent until August 2nd.

The Specter of American Bankruptcy

If Congress does not raise the debt ceiling by the aforementioned date, then the U.S. government will become at least partially insolvent. On Tuesday, President Barack Obama would be forced to cut federal expenses by about 40 percent. This will result in unpaid pensions for workers and soldiers, or a default on the debt; this would spell bankruptcy for the biggest debtor in the world.

The problem is that the Republicans in the House of Representatives do not want to raise the debt ceiling. In exchange for a raise, they have demanded that Obama cut the deficit by $917 billion in the next ten years. The Democrats, who control the Senate, do not agree and are proposing a $2.3 trillion debt ceiling raise in exchange for a $2.7 trillion deficit reduction within the decade. The Republicans do not want any tax hikes, which are part of the Democratic plan, and want to gradually raise the ceiling. First, they want an initial $900 billion, and then another $1.6 trillion, but only after cutting the budget by $1.8 trillion. This solution would be uncomfortable for Obama, as it would make him weak before the 2012 elections.

The Weak Dollar

The debate is purely a political one, and does indeed have consequences for the next election. No one believes that American will actually go bankrupt, which is supported by the low interest rate on American debt. The dollar, however, has been suffering, especially against the Swiss frank and gold. The financial markets have also been jumpy, as investors have been wary of political instability, and its influence on the cost of credit.

Doubts as to the creditworthiness of the U.S. have eclipsed the published macroeconomic findings. The housing market remains in terrible shape. The number of houses sold in June fell to 312,000, three thousand lower than the previous month. For comparison, at the height of the housing bubble, the U.S. built and sold over one million homes each month. The American markets are still facing oversupply, and home prices have reached their lowest in decades. The S&P Home Price Index, which measures housing prices in 20 American cities, has fallen 4.5 percent.

Struggling Manufacturing

Because the housing sector has been mired in downturn for the past five years, it has not caused much alarm among economists and investors. The manufacturing sector is a different story, having slumped again after recovering from the recession. In June, the value of orders for durable goods fell by 2.1 percent, despite forecasts of a 0.3 percent rise. The Federal Reserve has shown a slowdown of growth in 8 out of its 12 regional branches.

Despite the troubles of the Americans, the Poles have remained optimistic, which can be seen in retail sales data from June. Profits jumped 10.9 percent since last year and 1.4 percent since May. An adjustment for inflation still shows a robust 6.4 percent growth. However, these high gains are probably unsustainable. High inflation, stagnant wages, and the low employment growth will cause Poles who want to keep spending to start borrowing money. This is not a solution for the long term.

Still, economists and politicians are in a good mood, and they estimate that the Polish economy will grow by about 4-4.5 percent. This, however, looks weak when compared to the 5.3 percent growth of GDP in Sweden. Our northern neighbor has not stopped to surprise Europe by having the highest growth rate, while retaining a government surplus and lowering taxes.