By: Dr. Mike Campbell

Next year, the American people will elect their next President. The people are often fickle and have relatively short memories in many cases. When President Obama came in to office, he had control of both US houses, the Senate and Congress, but his party lost control of the House in mid-term elections. This means that his government cannot pass legislation without the support of the Republicans.

In order for the USA to meet its financial obligations, the ceiling on borrowing must be raised before the end of the month. If this doesn’t happen, the USA will default on part of its debts in early August. Given that the ratings agencies have downgraded Greek, Irish, Portuguese and Spanish debt over the possibility that these nations may default at some stage (in the first three cases, before their EU/IMF bailout packages expire), the threat that they may review America’s AAA status when it could default within a fortnight seems a little timid.

Market reaction around the world to the sovereign debt crisis in Europe and the USA has seen value lost. However, the falls have been deeper and more sustained in European markets than in their American counterparts. It is as if the business community simply cannot believe that the world’s largest economy is at risk of default. The difference is that America will only default if its politicians choose to let it. If a compromise is found in time, the borrowing ceiling can be raised and America’s obligations can be met. If the politicians fail to strike a deal, it will be one of the costliest own goals of all time and the wider ramifications are likely to produce a financial tsunami every bit as deadly as the one that struck Japan in March.