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America could be about to make us all poorer – again
Our ‘special relationship’ with the US comes with particular consequences – and unless they can resolve their differences this week then the land of the free could be about to plunge us back into recession
The clock is ticking and the US is getting closer to D-day… unless they agree a vote, this week the world’s largest economy could run out of money.
Without a deal between the two ideologically opposed sides in Congress, the US will not raise its debt ceiling meaning it may not be able to pay its bills. That means it will have to choose between paying its army, the police, its creditors or other essential spending – or potentially not be able to pay anyone at all.
If this is allowed to happen then analysts and market commentators have warned us of the Lehman-Brothers-esque impact on financial markets.
But how would it impact us here in Britain?
The first thing to look at is trade. The US is our largest trading partner; more than $50 billion of our goods and services are sold to the US every year.
The US sells us a roughly similar amount, and we are the 6th largest trading partner of the US, which is no mean feat, given our relative small size.
If the US fails to raise its debt ceiling then the government’s purchasing power could be severely curtailed as it tries to prioritise repayments of its outstanding debts. So, all of a sudden the US will not make it a priority to buy our stuff and boost our economy.
[What happens after the US goes broke]
Beyond trade
It is not only Treasury who need to worry about the impact on our economy, it could impact the man on the street too.
People who own stocks, both in the US and over here, should expect a wild ride if the US hits its debt ceiling.
The importance of the US to the global economy means that if the US coughs then the rest of the world tends to catch a cold, so sharp losses in US stocks could hurt markets across the globe.
Even if you don’t directly own stocks, don’t think that you have got away with it lightly, you probably have a pension and the chances are some of that pension is invested in equities.
You may not feel a direct impact from the current impasse on Washington, but it could still hurt your bottom line.
[How minting a trillion-dollar coin could fix this]
Default lines
The scenarios above could happen even if the US fails to raise its debt ceiling but manages to avoid a default. But if the US fails to pay its bills then financial Armageddon could be upon us.
Banks and companies here in the UK have American assets and holdings and if they lose value then it could bring down the financial system here in the UK.
Added to that, if we were willing to stand “shoulder to shoulder” with the US during the Iraq war then surely we should help bail out our favourite nation?
A bailout to the US, with a $14 trillion economy, would make Portugal, Greece and Ireland look like change you found down the back of the sofa.
Bailing out the US could rapidly increase our already high debt load, and - to add insult to injury - the credit rating agencies may feel that our close relationship with the US makes us more risky as it increases the chances that we have to provide financially for our friend the other side of the pond.
Friends with benefits, forget it. Friends with consequences, more like.
[Resolving debt ceiling 'mission-critical' for global economy]
Long term pain, short term gain?
In the long-term, if the US falls then so could we, so we better hope that Washington does the sensible thing and raises the debt ceiling in the next few days.
But in the short term there may be a silver lining for the UK. Firstly, investors may ditch high risk US debt and start buying UK Gilts instead, which is positive as it would make borrowing (to fund our trade deficit) cheaper.
Secondly, the Bank of England would more than likely go into money-printing overdrive to try and keep interest rates low to protect our economy and, thirdly, the pound may rise as investors sell the US currency.
Almost overnight those trips to New York or California could become much cheaper for UK tourists.
But, overall, we should be clear, if the US fails to raise its debt ceiling and then goes on to default this is very bad news for the global economy and could go down in history as the most stupid thing politicians have done economically.
And it’s getting closer. “What if” the US does default has turned into “what should we do if the US does not raise its debt ceiling and politicians find no middle ground?”
They have until Thursday and a day is a long time in politics, so a deal is still possible, if one is not found then we will all be hunkering down like it is 2008 again.
Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.
