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Economy

America’s Dogfight over Debt Woes Worsening

Jun 07 , 2011

The dogfight between the two major US political parties on whether to raise the federal deficit ceiling and avoid a default on American debts has just begun.

The stakes are high that, if no agreement comes out, the US would be sent to another financial crisis and the global economy would face the dim prospect of another great recession.

China, now holding more than 8 percent, or nearly $1.2 trillion US Treasury bonds, is certainly concerned about the quagmire, as the security of the debts repayment is on the line.

Currently, Chinese online chat-rooms are awash with ordinary people's demands for Beijing to draw down its purchase of American debts, and shift to other securer investments including buying more oil and resources as strategic reserves.

On Tuesday, US Congressional Republicans defeated a bill that proposed for a $2.4 trillion increase in the nation's debt limit. The lopsided vote, with just 97 in favor of the measure and 318 against, doesn't bode well for the impending difficult negotiations between the White House and the Congress.

The conservative Republicans are demanding deeper cuts into Obama's government spending plans to accompany any rise in federal borrowing. Their demand seems popular among a majority of American voters. For a long time, Americans have thought their governments have been addictive to spending on borrowed money, dragging the world's largest economy to a big fiscal hole.

Analysts say that the Republicans will have to back down. If they refuse to raise the debt ceiling – now set at $14.29 trillion., the US government will run into bankruptcy, which will immediately cause a flight of the US dollars and send the US economy back to contraction, if not a depression.

Eventually, a compromise between Obama-led Democrats and the conservative Republicans will be reached before August 2, the date the Treasury Department believes its coffers will run out.

However, Tuesday's vote sends a clear signal to US politicians that their long affection for deficit spending is unsustainable. House Speaker John Boehner said: "It's true that allowing America to default would be irresponsible, but, it would be more irresponsible to raise the debt limit without simultaneously taking dramatic steps to reduce spending and to reform the budget process."

Actually, the US could choose to reduce federal funding on retirees' pensions and medical care appropriations to constrain spending. The White House and Congress could also agree to increase taxes on personal income and corporate income to boost the federal budget.

But, it is politically perilous for both Democrats and Republicans to tell Americans to tighten belts. It is hard for Americans to get rid of their habit of lavish spending and saving less.

Source: People's Daily Online

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