Down to the Wire

With the deadline of August 2nd fast approaching, a deal to increase the US debt ceiling appears a long way off, with Democrats and Republicans lawmakers still arguing over the size of speeds of spending cuts and tax increases.

Under congressional rules, the upper debt limit of $14.3tn will be breached by August 2nd, and without an increase, the US could potentially default on debt repayments. The repercussions of such a move would be catastrophic, leading to widespread panic across Equities and Bond markets and probably triggering a second global recession in four years.

Democrats are arguing for a larger increase in the debt ceiling, which will give more time for the economy to recover, whilst protecting social support programmes, and increase in taxation. Republicans are, by and large, also willing to allow the debt ceiling to increase but only by a small amount, which will only alleviate the problem for a few months. In exchange, Republicans would like to see a hefty reduction in public spending and fewer tax increases. A small number of hardline "Tea Party" members are taking the stance that they will not vote for any increase in the ceiling whatsoever.

Without the ability to increase their borrowing beyond 2nd August, the US would quickly be unable to meet interest and principal on its Treasury Bonds, which would trigger a default, quickly followed by the reduction or cessation of social security payments, which would cause widespread panic. The debt rating agencies, S&P and Moody's, are content to maintain the coveted "AAA" rating on US debt for the time being - however, should a deal not be reached, this will quickly be lost.

I take the stance that a deal WILL be reached, and that the current wrangling is little more than political point scoring. However, the deal will be something akin to a sticking plaster over a gaping wound, merely pushing the problem into next year when tough decisions will need to be made once again.

In the meantime, the safe haven that is Gold continues to march northward, pushing through $1625 an ounce on Wednesday.