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Today on Down to Business English, Skip Montreux explains what was behind the debt ceiling debate in the United States? Exactly how much money does the world’s largest economy owe? Who are they indebted to? What would have happened if an agreement hadn’t been reached? 

This is Skip Montreux, still flying solo in Tokyo Japan and you are listening to Down to Business English.

Thanks so much for downloading the show today. Here in Japan the summer is proving to be as hot and sticky as ever. Making matters worse is the limitation being put on power consumption here in the Kanto region. One ramification of 34 of the country’s 55 nuclear reactors being taken offline is the mandatory cut in power that government has placed on businesses and the voluntary cut they are asking of private households. Most people, and companies are achieving those reductions by strictly setting air conditioners at 28 degrees. Boy it can get uncomfortable. On the positive side, there have been no power outages which means D2B can continue to record and release stories of business news from around the world.

Dez is still on his holidays but I have to give him a big shout out as he really has gone the extra mile to research and write today’s episode. Currently he is in India and I was able to speak with him briefly on Skype the other night. He asked me to send his regards and has promised to come back with a special report on India when he returns. Dez, we are looking forward to that.

Today on Down to Business English we look at the debt crisis that was recently narrowly averted, at least temporarily, in the United States. Even though it is the home to the largest and most powerful economy in the world, the U.S. finds itself heavily indebted today and serious measures are needed to get the country’s fiscal situation in order. But how exactly to accomplish that is up for debate and the outcome is by no means certain. So let’s do it. Let’s get D2B, Down to Business with Debt Crisis in America.

To get a handle on how big America’s debt actually is, there are two important figures to understand. The first one is $14.3 trillion. That is the current debt ceiling placed on the U.S. administration by the American Congress. In order for the U.S. administration to go into debt beyond that amount, it needs the approval of the American Congress. The fact of the matter is that the U.S. government surpassed the debt limit back in May of this year. Since that time, the Treasury department has been using a variety of bookkeeping maneuvers to buy time and its Secretary, Timothy Geithner, set a deadline of August 2 for Congress to raise the debt ceiling. If the debt ceiling was not raised, the U.S. government, for the first time in history, would not have been able to pay its bills.

Hanging over the head of the debt ceiling negotiations were warnings from credit rating agencies. Both Standard & Poor’s and Moody’s said that they would downgrade the U.S.’s rating if an agreement could not be reached and the debt ceiling not raised. Rating agencies like S&P and Moody’s assign a rating to debt based on how risky, or how likely it is the borrower won’t pay back their loans. The highest and most desirable rating is AAA, which means that there is very little chance that the borrower will not pay back the amount borrowed plus the interest. Most stable and developed country’s debt are rated at AAA as there is little likelihood that these countries will be unable to make the repayments.

The other important figure to understand is $1.29 trillion. That was the size of the annual budget deficit in 2010. In other words, last year the U.S. government spent $1.29 trillion more than what it collected in taxes and other revenue. To make up for that shortfall, the government needed to borrow yet more money, adding to the overall gross debt.

Who exactly is the U.S. indebted to? Well, China owns the most U.S. debt with $1.1 trillion, Japan second with $0.95 trillion, and the UK a distant third with $0.35 trillion. Also in the mix are the nations of Brazil, Canada, Hong Kong, Taiwan, as well as large insurance companies, oil exporters, and mutual funds.  The bottom line is if the U.S. defaulted on any of its loan payments, the effect would be felt globally.

So in a nutshell, the U.S. spends more money than it makes. This results in the government borrowing yet even more money. However, it has now gotten to the point that, by law, the government can’t borrow any more money without getting the approval of Congress. And many of those elected members of Congress do not want to raise the debt ceiling without first reducing the annual deficit.

There are two ways for a government to reduce its deficit. It can either collect more tax revenues or spend less money. As you can imagine deciding which government programs the spending should be cut from, and how much taxes should be increased, and who should receive those tax increases, has been a point of contention between the main political parties.

Essentially the Republicans have been strongly opposed to a raise in taxes which they believe would cut consumer spending and so kill any possibility of a recovery in the economy. Democrats on the other hand are opposed to any cuts in welfare and healthcare programs aimed at helping the middle class and poor.

Over the past few weeks there have been several proposals. One plan was titled ‘Cut, Cap and Balance’. It would require the government to immediately cut spending, cap or limit future borrowing and produce a balanced budget. President Obama stated that this plan was far too strict and if it passed the House and Senate and ended up on his desk, he would veto it. Remember, the American President, unlike a Canadian or British Prime Minister, has the power to veto, or stop, any regulation or law that he doesn’t agree with. But Obama didn’t have to veto that proposal because it couldn’t get enough support to pass in the Senate.

In the end, the agreement that was reached required enormous compromises from both political parties. The deal involves a two stage process. The first stage calls for a $917 billion spending cut to happen immediately in turn for the debt ceiling to be raised $900 billion. In the second stage, a special joint committee of Congress will recommend a further $1.5 trillion in deficit reductions by November. When those reductions are in place Congress will approve another raise in the debt ceiling of up to $1.5 trillion. Although the agreement has passed both the House of Representatives and the Senate many of the far right members the Republican party and far left members of the Democrat party are still very unhappy. Nevertheless, an agreement was made and the debt ceiling raised, and the U.S will not be defaulting on its loan obligations in the near future. And their AAA credit rating remains intact.

So why should the U.S. care about the rating that agencies give its debt? Well, the interest rate that the lender requires to lend money is directly related to how risky the loan is. Therefore a move from AAA to AA+ would mean that the U.S. was a more risky prospect so would need to pay higher interest rates to the lender. The effect of that would trickle through the entire U.S. economy as there would be an overall increase in interest rates on everything from car loans, home mortgages, and the lines of credits many businesses depend on for cash flow. A similar effect happened in Greece when its debt was downgraded with the result being Greece having to pay in excess of 20% interest at one point. That was before the EU offered a further bailout to calm the markets.

So that is the situation with the American debt crisis as it stands today. Far from being resolved it seems like the stage is only now being set for the next U.S. presidential elections. On one side it will be the Republicans fighting to cut more and more spending and on the other it will be Obama and the Democrats trying to raise taxes. Both approaches will have a powerful impact on the global economy and business.

Now it is time for you and me to get D2V…Down to Vocabulary.

 

First up I have the countable noun ramification. A ramification is a consequence or the effect of an action. In the story I said that one ramification of the shut down of so many of the nuclear power plants across Japan is that the use of air-conditioning has been severely restricted. A further example connected to the story is if S&P and Moody’s had downgraded the U.S. debt status the immediate ramification would have been a rise in interest rates.

Now let’s take a look at the expression to go the extra mile. This expression communicates that the Subject of the action is putting a lot of effort or doing their very best to succeed, or help someone else succeed. In the introduction to today’s story I said that Dez has really gone an extra mile to help with the show. Even though he is on holiday he is really helping me release shows through his research and writing. Thank you very much Dez!! I hope I do the same when I take my next holiday. Listen to this business example: In his email to all employees last week, the President asked everyone to do their best and go the extra mile as the company’s future is in trouble due to all the economic uncertainty. He was asking that everyone put in extra effort to help the company succeed.

Next I have the verb to avert. To avert something is synonymous with to avoid or to miss. It is commonly used in both active and passive voice. In the story, I used it in the passive voice when I reported that the U.S. debt crisis was recently averted. In other words, the U.S. came close to creating an economic crisis but was able to avoid it, at least for a short time. Here is another example. Recently the cockpit voice recorder of the Air France flight that crashed en route to France from Brazil in 2009 was recovered. From listening to it, investigators have learned that the pilots struggled for several minutes to stabilize the aircraft and avert a crash. Unfortunately, they were not successful and all 228 people on board lost their lives. A very tragic story indeed.

Moving on we have the noun ceiling, which in general terms means the wall at the top of a room opposite the floor. In economic terms however a ceiling refers to the upper limit of something. Interestingly, the word floor is also used idiomatically to mean a lower limit. In the story I talk about the debt ceiling or upper limit that the government can not cross without further negotiation. Oil producing countries know that there is a ceiling or limit to how much they can charge for a barrel of oil before people stop driving as much and there is reduced demand which brings the price crashing down.

Following on is the expression to be hanging over the head of something. This expression communicates that there is a larger problem or issue that is influencing a situation. In the story I said that hanging over the head of the debt ceiling negotiations was a warning from credit agencies that the U.S’s credit rating may be downgraded. This means that the threat of being downgraded added even more pressure to the negotiations. Here is another example: My schedule this week is very busy. Not only do I have several meetings to attend everyday, I have a major presentation next week hanging over my head. It will be hard to concentrate on the meetings as I am worried about not having enough time to get ready for the presentation.

Now let’s take a look at the phrase a point of contention. This is a common business phrase that can describe an issue that causes disagreement between people or parties. Earlier I reported that the issue of raising taxes is a point of contention between the political parties in the U.S. What I meant was that the Republican party and Democratic party strongly disagree on whether or not to introduce new taxes. Listen to this example: One point of contention between Dez and I is what time of day we should record Down to Business English. I really hope we can record midday Tokyo time as it fits my schedule but he strongly insists that we record early evening his time, which is midnight in Tokyo. You would never guess who usually wins…..(yawn)

Now I have three verbs for you cut, cap and balance. To cut means to reduce, to cap means to limit and to balance means to get two or more things to be equal to each other. In the story I talked about a Bill that was proposed that would cut the deficit, cap any future spending and then finally balance the budget and so stop the U.S. government from borrowing any more money. An example in business would be if a company was undergoing financial difficulties it might choose to cut salaries or put a cap on any bonuses that might be paid so that it could balance its accounts with the hope of returning to profit in the near future.

Finally today is the verb to trickle. In the report I said that the effect of higher interest rates would trickle through the economy. To trickle means to move slowly and gradually. Here is another example: since our last report on the scandal rocking Rupert Murdoch and The News of the World, even more details have trickled out about illegal activities of British politicians, police, and reporters. Slowly, we are getting a better picture of what is going on.

And that is all the time we have for vocabulary today. I encourage you to listen to the report again and focus on how those words and phrases are used in the context of today’s story.

 

Thank you so much for downloading D2B today. I hope you managed to bear with me while Dez is away on vacation. If everything goes according to plan, he will be back with us very soon.

Just before signing off today I would like to remind you stop by the Down to Business English Website and sign up for our newsletter. In the newsletter you will find updates and more details on the some of the stories we cover here on D2B, links to interesting videos and websites related to the topics, and sometimes a Business English study tip. And for a limited time, when you sign up for the newsletter, you will receive a FREE copy of our Year In Review 2010 eZine. That’s over 3 hours of additional vocabulary explanations and test style comprehension questions. And for those of you who have already signed up for the newsletter, don’t worry, your free copy is on the way. So what’s stopping you. Head over to www.downtobusinessenglish.com and sign up for the newsletter.

Thanks for listening everyone. See you next time.