23 June 2011

China to replace U.S. as the next super power?

The robustness of the U.S. economy has become a figure of concern for the Asian powers like China and India. The all time raising debt of the U.S. and they crossing the debt limit is bringing on the shadow of nervousness among global nations as a debt default may take place and it will become a global crisis for everyone. Chairman of the U.S. Federal Reserve, Ben Bernanke, has warned that the country's creditworthiness is at risk if its borrowing limit is not raised.

U.S. debt is $14.3 trillion and they have crossed the debt ceiling limit by about 11 billion as of May 2011. The increase in the debt limit has led to suspension of some major investments and major spending cuts by the country. It will also bring down the dollar currency value.

"The consequences of failing to raise the debt ceiling would be Armageddon-like in terms of the economy -- the impact on interest rates, on job creation, on growth would be devastating," White House Press Secretary Jay Carney said. "The U.S. certainly knows that the Chinese are probably the most important customer" for Treasuries, said Cliff Tan, head of emerging-markets research at Societe Generale SA in Hong Kong. "In the event of the unthinkable happening in Congress failing to raise the debt ceiling, you're going to have a major, major earthquake in global fixed-income markets."

If the debt limit is not increased then U.S. will face a debt default (default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan.)

The default will further slow down the development around the world and will pave way for China to become the super power as China is the largest foreign creditor to the U.S. which holds more than $1 trillion in Treasury debt as of March 2011 or in other words, China is the biggest lender for U.S.

The International Monetary Fund recently predicted that the size of China's economy would overtake that of the U.S. in terms of purchasing power parity (PPP) by 2016. Purchasing power parity measures a country's income using a set of international prices applied to all economies.

Trying to resolve the debt issue, President Barack Obama has been seeking to win congressional approval to raise the nation's debt ceiling before an August 2 deadline.