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External Debt

Tuesday, September 04, 2007

It looks as if US Congress has a few things to take care of prior to elections scheduled for 2008. The US economy has been highly dependent on foreign creditors, such as China, Japan and Russia. And to make things even worse, the Bush administration is once again planning to increase the upper limit of total external debt to almost 9 trillion dollars.

Bush has already asked for an increase in foreign debt several times before and this has not stayed unnoticed. Up until now, president's administration has managed to shake off any concerns about the trillions of dollars that US owes to Asian countries and oil importers in particular.

 However, according to experts, US is about to face a new issue regarding a mix of foreign investments and government controlled funds. The worst case scenario is that US may face federal default and overall bankruptcy already this year.

Now that the global financial stability isn't facing its best times, the administration has seriously started to worry about foreign creditors converting their money holdings into investment funds to overtake companies, banks, real estate and other assets in the USA.

American form of economy has been known for the amount of freedom provided to local and foreign investors. Any investment is welcome as long as it doesn't possess danger to the national security. Provided that a strong economy is able to deal with any undesired economic activity, we should not encounter any significant changes in the investment sector.

Nevertheless, certain experts have a few arguments to back up their fear for the possible default. History has shows administration's incompetence on dealing with economical issues. Bush, in his turn, comments that the growing national expenses are due to high unscheduled and military costs.

No matter how much Bush gets flamed by the Democrats, the main problem that whole of US may end with is economical decisions being made in other capitals, besides Washington. That may sound absurd but it has never been excluded from the list of possible outcomes of a huge external debt.

America, being a liberal country initially, is now facing a situation where its overall debt is almost half owned by foreign creditors. According to certain pessimistic predictions, this can end up in foreign governments controlling local companies. The nationalization is not the process US wants to face due to that.

Furthermore, externally controlled assets can result in higher prices for stocks, bonds and real estate. But the thing to worry about it is not just the prices for general investment tools. There is a possibility of dangerous political interference - an issue that has never been spotted before.

To fight any unwanted influence from overseas, Bush has urged the International Monetary Fund and the World Bank to come up with a set of rules for funds controlled by foreigners. In particular, externally controlled funds should be obliged to disclose investment methods.

On the other hand, things may not be as dull for credit cards industry. In case of an increase in prices of real estate, rate of defaults may decrease simply because people would get more chances to make monthly payments due to increased mortgage rates. But this will only happen in a short run. In a long run, however, credit card companies will probably increase rates on credit card deals to cope with market instability and federal default.

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