US borrowing crisis ' Three days away' from danger, says World Bank head

The president of the World Bank, Jim Yong Kim, has warned that the United States is just "days away from a very dangerous moment" because of the government's borrowing crisis.

He urged US policymakers to reach a deal to raise the government's debt ceiling before Thursday's deadline.

The US Treasury will start to run short of funds if no agreement is reached for it to borrow on financial markets.

Mr Kim warned this could be a "disastrous event" for the world.

"The closer we get to the deadline the greater the impact will be for the developing world.

"Inaction could result in interest rates rising, confidence falling and growth slowing," said Mr Kim, speaking at the World Bank's annual meeting in Washington.

 “Start Quote

There are three examples in US history that come close to default, with the most recent occurring in 1979”

·                                 What happens in a US debt default?

"If this comes to pass it could be a disastrous event for the developing world and that will in turn greatly hurt the developed economies as well," he added.

The facts: We have two separate yet connected issues as each is currently being used as a political negotiating tool.

The US Budget.
On October 1, 2013 portions of the US Government shut down ( affecting 800,000 of the total 3.3 million government employees) as the Congress ( Republicans) failed to pass the budget as a ploy to hope to defund/delay the implementation of Obama Care. 

Note: The US Government Fiscal Calendar runs from October 1st to Sept 30.

Debt Ceiling:

The current US Debt is $16.7 trillion US Dollars and on October 17th the US will exceed the available dollars and run out of money to pay its debts, including investments and interest payments to worldwide creditors. 

What happens if the US government cannot borrow funds to pay its debt obligations (interest)?

1. The US Government will default.
This is whats is been discussed in the media however I feel that this is the most unlikely scenario, there are ways the US government could continue to pay its obligations even without an increase in debt.
However if this happens, I expect to see a major Domino effect destabilizing the entire world economy because the US$ is the de-facto reserve currency of the world, and most assets are priced with the yield on the US treasury as the base. ... the Yield is the interest rate on the US treasuries..... so if the USA defaults the yield will rise and the Stock markets will crash.

This would mean the US$ would collapse, about 30-50% ; just like it did in 1971 when the Gold window was arbitrarily closed by the US Government (Nixon) 

2. The US Government Cuts back on spending.
In case the USA cannot increase its borrowing, a way for it to pay its debt is by reducing spening especailly in the Military sector where it currently spends 
Does not raise the debt ceiling causing the US to begin to default on some debt payments and being to implement cutbacks most probably, in Military funding.... where it spends more than the rest of the world combined.

This would increase the value of the US$ 


3. Sell assets.
USA has the most amount of gold available in its reserves, The US Treasury Could Make The Case For Selling The Gold Reserves and other assets to pay its bills.

This would cause a drop in the value of Gold and would also depreciate the US$ , though not as significantly as the option 1.

4. Print it self out of the problem.
The US govt can create money out of thin air, the reason  inflation has been under control as yet is, because the US government has chosen to borrow money instead of print money; if the govt cannot borrow, it may try to print its self out of this hole , though will create a "bigger" inflationary whole in the process.

This option would cause the US$ to weeken.


I would believe if put in a tight spot the US government would resport to a combination of option 2, 3 and 4.