The global economy faces further meltdown as world rulers scrabble to prevent the crisis deepening.
The US, the world’s biggest economy, faces a potentially devastating default.
The Republicans and Democrats are in deep conflict about an agreement on increasing the country’s “debt ceiling”—the maximum level of government borrowing set by Congress.
This stands at $14.3 trillion. If it is not increased by 2 August, there is the immediate risk of federal money running out.
The deadlock could see the US’s credit rating drop from its current AAA status, making it more difficult to borrow money.
Both Republicans and Democrats are united in wanting to push through trillions of dollars in spending cuts—and want to reduce the deficit.
But Barack Obama wants to reduce the deficit by $4 trillion over the next ten years, with big cuts alongside tax increases.
The Republicans, however, want an immediate cut of $2.4 trillion without the rich paying any more tax.
A US default would deepen the world crisis. Jamie Dimon, chief executive of JP Morgan, said, “No one can tell me with certainty that a US default wouldn’t cause catastrophe and wouldn’t severely damage the US or global economy.”
The row has already had an impact. Many investors are trading in their US currency for gold, fearing the currency will devalue.
If the 2 August deadline passes without agreement, the US will be unable to borrow and have to rely entirely on tax income to fund all its operations.
Obama would then have to make huge, immediate cuts—which could include a halt to all pensions payouts, unemployment benefits or military pay.
This would devastate the lives of the country’s poorest people.
An increase in the debt limit is common in US politics—it has been raised ten times in the past ten years.
But both mainstream parties are using the limit as an excuse to force the poorest to pay for the crimes of the banks and years of war. The only difference is the scale and speed of the attack.
Meanwhile, the eurozone also faces huge problems, as default and contagion stalk the continent.
An emergency summit was due to be held on Thursday to discuss a unified strategy to deal with the mounting threat.
The talks aim to discuss increasing the powers and funds of the European Financial Stability Facility (EFSF).
This can provide limited bailouts, although not enough to bail out Greece or Spain—the economies most at risk of collapse.
But any change to the EFSF would need to be passed by all eurozone parliaments, slowing down the process.
Italy became the latest country to push through an austerity budget last week in an attempt to stem the turmoil.
Credit rating agencies were threatening to downgrade its status. Its hospitals have already started to charge for treatment.
This comes as the European Banking Authority published the findings of its “stress tests” on European banks.
Eight banks failed the test of whether they would survive the recession, and will need to raise 2.5 billion euros to return to “health”.
But the test was designed to boost market confidence rather than give an accurate picture of the crisis.
It failed to consider the likelihood of a Greek default or the spread of the crisis from the least stable economies.
European leaders were terrified that a poor result would lead to panic selling by investors.
Despite this, European markets fell early last week.
The crisis on both sides of the Atlantic shows the real fear among leaders of a rapid deepening of the crisis. It also shows they have no idea how to solve it.