The US has until Tuesday (2 August) to raise its debt ceiling (the legal limit to what it's allowed to borrow) or it will begin to default on obligations to its creditors.  Here's who those creditors are and what the likely outcome will be if American politicians fail to reach an agreement…

The US of A is drowning in massive amounts of debt; $14.3-trillion to be more precise.  That is just about as large as the GDP of that country, or 40 times the value of all the goods and services produced in South Africa in a year. 

But who holds that mountain of debt?  The short answer: everyone.

The long answer

US individuals and institutions hold 42.1 percent of all the government's debt.  Of that 42.1 percent, the US Federal Reserve holds 16.9 percent or about 7.1 percent of the total national debt, which is less than China does.

The Social Security Trust Fund (an old age and disability insurance trust fund) owns 17.9 percent of US debt followed by China, which holds 9.5 percent, and Japan at 6.3 percent. 

The US Civil Service Retirement and Disability Fund has six percent of all US government debt on its books, the US Military Retirement Fund has 2.1 percent and the United Kingdom 1.4 percent.

The oil exporting countries (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya and Nigeria) collectively hold 1.6 percent of US debt, while Brazil owns about 1.3 percent.

The US government owes every country on Earth money and together (not including China, Japan, the UK, Brazil and the oil exporters) they hold 11.7 percent of US debt.

Why the US must never default

If the US defaults, or even if its credit rating drops a notch, the effect will reverberate all across the planet.  Firstly, investors in US debt (i.e. everyone) will demand higher yields (in the form of interest payments) for holding US debt as owning this debt will be considered riskier than the virtual risk-free status it enjoyed before.   Long-term interest rates in the US will have to rise in order to entice lenders, leading to more expensive mortgages and loans for businesses.

In other words, the cost of capital for the American government, citizens and institutions will skyrocket.  Consider the implications of an over-indebted nation (with a struggling economy) used to just about free money, but now having to pay for it.

The Great Great Depression?

If the US defaults, or even if it gets a ratings downgrade, all the trillions of dollars of debt the world owns (including that which you and I own, even if we're not aware of it) will be worth less.  Untold wealth will instantly vanish off balance sheets across the planet.

If the credit rating of one of the world's very few examples of an almost credit-risk free asset (US government debt) deteriorates it might lead to deterioration in the rating for all bond markets and higher interest rates everywhere.  The reasoning seems twisted, but lenders might think, "Wait a minute.  If the US can default, then everyone can.  If I can't trust the American government to pay on time, how can I trust the South Africans?"

Economics, as life, is not fair and if the Americans don't pay on time we'll all suffer for their ill discipline.

How likely is a default?

A default will herald the apocalypse and for that reason it is highly unlikely that the Americans will allow it to happen.  A much more likely outcome of all this is a downgrading of the US's AAA credit rating (the best possible score).  This is possible even if the debt ceiling (the maximum amount that the US government may borrow by law) is raised.

Will the government devise a convincing strategy for reducing its perpetual deficit spending?  Said in another way; will they be able to convince their creditors that they'll can spend less than they earn in future?

It's a tall order.  In all probability the US will emerge from this with a weaker dollar, higher interest rates and an economy that'll move sideways, at best, for many years to come.