With the federal government in hock up to its eyeballs, the debt ceiling must be raised soon to prevent further economic catastrophe. Image: CC Sugar Pond/Flickr

Government spending will hit the federal debt ceiling soon if Congress doesn’t vote to raise it. A political fight lies ahead as newly-empowered Republicans vowing to cut spending threaten to vote against raising the debt ceiling. However, if the debt ceiling is hit, the U.S. government goes into default and the global economy could be crippled.

Inside the federal debt ceiling

The federal debt ceiling, the amount of money the government is legally permitted to borrow, is $14.3 trillion. Government debt has reached about $13.9 trillion and it’s growing every day. With the debt ceiling “only” $335 billion away, the Treasury Department estimates that limit will be reached somewhere between March 31 and May 16. The debt ceiling applies to debt owed the public in the form of U.S. bonds and debt owed to government trust funds such as those funding Social Security and Medicare.

Consequences of hitting the debt ceiling

Regardless of Republican rhetoric about spending cuts, raising the debt ceiling has nothing to do with spending more money. The debt ceiling needs to be raised now because of legislative decisions already made, primarily during the Bush administration. On Thursday Treasury Secretary Timothy F. Geithner warned lawmakers that if they would not raise the debt ceiling, borrowing costs would rise for federal, state and local governments, as well as for businesses and consumers. Millions of jobs would be lost and stock prices, home values and retirement savings would plummet.

A golden opportunity to score political points

House Speaker John Boehner said Congress can’t raise the debt ceiling without more spending cuts. House Republicans have said they would blackmail the Senate and the White House by only voting for a higher debt ceiling in exchange for returning the federal budget to 2008 levels. But refusing to raise the debt ceiling is like refusing to pay one’s bills. Most analysts expect House Republicans to experience a brief flash of common sense when its time to vote. An economist told Bloomberg that raising the debt ceiling, however painful the vote, is merely a chance to score political points.

Sources

Bloomberg

CNN

Fox News

The Santa Claus rally is a year-end stock market surge occurring in countries where Christmas is a national holiday. Image: CC Vanessa Pike-Russell/Flickr

The Santa Claus rally in the stock market, if it has arrived on schedule, will begin Monday, Dec. 27. Historically the Santa Claus rally is the last five trading days of the year in countries that celebrate Christmas. The Dow Jones Industrial Average, already enjoying a strong December, hit a two-year high on Dec. 22.

Yes Virginia, there is a Santa Claus rally

The Santa Claus rally, also known as the “December Effect,” occurs during the final week of trading before the new year. A Santa Claus rally is generally reliable because of an increase in trading that must be executed before the end of the year for accounting and tax purposes. Santa Claus rallies are also attributed to traders anticipating the “January Effect,” an infusion of funds into the market that occurs at the start of the new year. Since the financial crisis hit in 2008 the January Effect has had diminished impact, but Santa Claus rallies in recent years have remained strong.

Evidence for the Santa Claus rally

The Santa Claus rally may have something to do with celebrating Christmas as a national holiday. A study by researchers at a New Zealand university found that year-end stock market surges became evident in Britain when Christmas became a national holiday in 1835. The same phenomenon started happening in the U.S when Christmas became officially observed in 1870. The study also found that year-end market surges are stronger in countries where Christianity is the dominant religion and Christmas is widely celebrated. The study, however, doesn’t answer the question of why celebrating Christmas would lead to a Santa Claus rally.

The Santa Claus rally 2010

The 2010 Santa Claus rally may have started early. The Dow hit a two-year high on Dec. 22 and gained for the 10th time in 11 sessions. As Christmas drew near, volume was light and many traders had already taken the week off. The market has showed optimism over signs that the global economy is improving. Reassuring statements from China about how the euro zone will be able to solve its debt problems have also helped. Plus, the general lack of economic news or corporate maneuvers during the holiday season have put normally jittery traders at ease.

Sources

MarketWatch

Investorplace.com

Wikipedia

Currency wars threaten global economic recovery as countries try to gain a trade advantage by manipulating the value of their money. Image: Thinkstock.

Currency wars are looming as nations try to jump start their economies during a global downturn. The U.S. has been increasing pressure on China to end the artificial suppression of the yuan’s value. Many other countries, including Japan, Brazil, Switzerland and Israel are trying to drive down the value of their currencies to improve exports. Concerned policymakers call currency wars a risk to global economic recovery and are calling for a spirit of international cooperation.

Currency wars: nobody wins

The prospect of a full-scale currency war seemed close Thursday when the dollar fell to an eight-month low against the euro, and the U.S. increased pressure on China to let its yuan rise. The BBC reports that although countries manipulate currencies for economic advantage, the cumulative effect undermines the global economy. Unilateral action by one central bank ignites conflict in other parts of the world. For example, last month Japan took steps to weaken the yen to make Japanese goods cheaper in the U.S. This led to a stronger dollar, which hurts a recovery based on rising exports and magnified the U.S. currency dispute with China.

U.S. dispute with China drags in Europe

The Associated Press reports that the House has approved legislation calling for economic sanctions on China and other countries manipulating their currencies. Hoping to create jobs, U.S. manufacturers want to make the dollar fall up to 40 percent against China’s yuan. Investors are expecting the Federal Reserve to try weakening the dollar by printing billions of dollars in new money. Because every country is connected in the global economy, that expectation has caused the Euro to rise, which is bound to anger European governments.

Why manipulating currencies is the wrong idea

In hopes of diffusing the currency wars, the International Monetary Fund is meeting in Washington this weekend. However, David Sterman at Investing Answers said the real solution is for the world to change its consumption habits. For the global economy to function, Sterman writes that countries such as China and Japan should increase domestic consumption to reduce trade surpluses. Countries like the U.S. should export more to reduce trade deficits. President Obama wants to double U.S. exports in five years. To do that, he needs China, Japan and the rest of the world to cooperate.

(Photo: Artemuestra/Flickr/CC BY-SA)

In the news, allegations have surfaced accusing China of forcing various entities in the technology industry to give Chinese establishments technology. Allegedly, this is required as part of their cost to do business in China, although China denies this. China’s increasing integration with the global economy has contributed to sustained growth in international trade.

The new wave of Chinese economics

China’s exports have recently become more diversified and have achieved greater penetration of industrial markets. This has been accompanied by a surge in Chinese imports from all regions — especially Asia, where China plays an increasingly central role in regional specialization. Tariff reforms have been implemented in China since the 1980s, and with its recent WTO accession, China has committed itself to additional reforms that are far reaching. Sustained implementation of these commitments would further deepen China’s international integration and generate benefits for most partner countries.

China emerges as a global power

Approaching this from a skeptical point of view, all the economic policies and trade processes that China is seen to be following could be a ruse in order to conduct or pursue its agenda in terms of increasing its advancement, even through illicit or prohibited means. It’s not as though China’s markets are free enough to have financial options like bad credit cash loans and installment loans. As China emerges as a global power, it is important to understand what role it will play and the security perceptions it has of both Asia and the world.

China’s view of U.S. society

The most important issue for China today is political stability at home. Any attempt to influence the status quo is not welcome and is deemed to be interference in China’s internal affairs. Many Chinese believe that the United States represents the core values of Western Civilization. Several believe the U.S. is in conflict with the Eastern civilizations represented by China. As a result, Chinese leadership views any American influence as a challenge to China’s political stability.

China aggressively pursues technology

In the 21st century, the status of superpower or world power requires a certain degree of technological advancement and progression. This is the age of information technology, and the fundamental resource of most modern and fast developing economies is technology. For a country to be powerful, it needs to possess a significant amount of advanced technology.

China is the world’s most populous country

Let’s assume for the moment that the allegations are true. Will the U.S. or any other country really do anything about it? Will the U.S. do as they said and really “push” China on the issue? That is highly unlikely. China is the world’s most populous country and the second largest energy consumer behind the United States. Rising oil demand and imports have made China a significant factor in world oil markets. Given this fact, China is a necessary part of the international economic system.

There would be significant repercussions if China is antagonized in any way. This means that by setting aside international trade policies, China can do pretty much what it wants in most cases. Given its status and place in the international arena, who can really do anything about it?

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RePEc: http://ideas.repec.org/p/imf/imfwpa/04-36.html