Avoiding American Debt Default with a Compromise on Thin Ice

President Obama consented to a plan with both political parties that will raise the debt ceiling for the American government. The American debt is legally limited to $14.3 trillion (approximately 1.1 quadrillion yen); the final date to raise the limit was August 2.

It is welcome news, coming as the time limit approached, that they finally came to an agreement and avoided the worst case scenario of a default, when funds on hand would not be enough to cover the national debt.

If they had fallen into default, acceptance of the dollar as the reserve currency would have rapidly decreased, value in principled countries and global financial institutions that back American debt would have declined and confusion would have reigned in the financial markets.

In the foreign exchange market, pressure to sell the dollar eased as a result of the relieving news and the sudden appreciation of the yen against the dollar has temporarily subsided. Altogether, stock prices in Japan and around Asia rose. They wished for stability in the financial markets.

According to the president, the deal consisted of cutting the budget deficit by $2.4 trillion over the next ten years and will implement the raise of the debt ceiling in two steps.

First, it will cut annual expenditures by $900 billion and raise the debt ceiling by the same amount. Furthermore, a nonpartisan Congressional committee will be established and by the end of the year will decide on a plan to cut $1.5 trillion from the budget deficit and similarly raise the debt ceiling.

Both the House and Senate should quickly approve a bill based on mutual agreement and present it for the president’s signature. The focus from here on out is the budget deficit reduction plan discussed by the nonpartisan committee.

In last year’s midterm elections, the concern from the opposing Republican Party’s conservative Tea Party came in the form of opposition to a raise on taxes. The difference in opinion was vast between them and the president and Democratic Party, which wanted a balanced financial reform of expenditure cuts and increased taxes.

The question is whether or not they will be able to agree on an effective budget deficit plan, as the issue will become entangled with next fall’s presidential election. Tax increases will most certainly be a focal point.

There is also a chance that the rating agencies could downgrade American debt if the budget deficit talks end insufficiently, due to the difficulty in rationally discussing opposing views between the parties. That possibility causes worries that could influence the global market.

The president must demonstrate his leadership ability in order to achieve healthy finances. Congress’ responsibility is also exceedingly important.

Meanwhile, the pressure on Japan due to the highly valued yen is continuing and, at nearly a historically high 76 yen to the dollar, is relentless.

A highly valued yen hinders revenue from export corporations and stands in the way of an economic rebound. Speeding up overseas manufacturing as a counter-measure to the strong yen would lead to a hollow industry. Each corporation needs to improve its domestic manufacturing and work on strategies to combat a highly valued yen. The government should also expand its support.