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Friday, August 5, 2011
Tuesday, August 2, 2011
US Debt Crisis
What’s this US debt crisis all about?
It is now August and this month the United States government expects to take in about $170 billion in revenues. Expenses will likely total more than $300 billion, however, so about $130 Billion will have to be raised by borrowing.
That is normal. The US government is deeply in debt – more than 14 trillion dollars – and it borrows to meet its debt obligations every month. There are usually more than enough people willing to lend the US government money because it is seen as a very safe investment.
What is not normal is that for the first time a substantial number of Republican lawmakers are not willing to allow the additional borrowing unless huge spending cuts without tax increases are agreed on. They have the power to force spending cuts because of what is called the "debt ceiling".
Periodically, the Congress authorises the US Treasury Department to borrow money up to a certain limit. That is the debt ceiling. In the past, whenever the debt ceiling was reached, Congress simply voted to increase it. That has happened dozens of times in the past without problems, but not this time.
The last election brought a large group of new Republican lawmakers into the US House of Representatives who were committed to forcing the government into balancing its budget. They are refusing to support raising the debt ceiling unless their demands are met. Since the Republicans control the House of Representatives, this threat has been taken very seriously.
This is a dangerous game, because if the debt ceiling is not raised very quickly, the US Treasury Department will run out of money and it will not be able to pay its bills. This could result in financial panic throughout the world, because so many people around the world either receive payments from the US government or have lent it money.
That is normal. The US government is deeply in debt – more than 14 trillion dollars – and it borrows to meet its debt obligations every month. There are usually more than enough people willing to lend the US government money because it is seen as a very safe investment.
What is not normal is that for the first time a substantial number of Republican lawmakers are not willing to allow the additional borrowing unless huge spending cuts without tax increases are agreed on. They have the power to force spending cuts because of what is called the "debt ceiling".
Periodically, the Congress authorises the US Treasury Department to borrow money up to a certain limit. That is the debt ceiling. In the past, whenever the debt ceiling was reached, Congress simply voted to increase it. That has happened dozens of times in the past without problems, but not this time.
The last election brought a large group of new Republican lawmakers into the US House of Representatives who were committed to forcing the government into balancing its budget. They are refusing to support raising the debt ceiling unless their demands are met. Since the Republicans control the House of Representatives, this threat has been taken very seriously.
This is a dangerous game, because if the debt ceiling is not raised very quickly, the US Treasury Department will run out of money and it will not be able to pay its bills. This could result in financial panic throughout the world, because so many people around the world either receive payments from the US government or have lent it money.
It now looks likely that some sort of a compromise will be reached at the last minute and a default on US government debts will not occur. Watch to see what kind of a deal is reached – if it is reached.
The following picture explains the historical data on how the huge debt is accumulated over the years. The existing debt has been increased quickly after the 2008 financial crisis.
Although it might be a bit early to predict with certainty the future implications of the debt crisis facing the US today, the situation is fluid enough to raise an alarm for the US government as well as foreign investors. Because of the recent financial crisis and the ongoing war on terror, the tax revenues of the US government shrunk while its expenditure increased. Consequently, there was a substantial increase in the government's deficit. In May 2011, the US government reached the legal limit of its ability to borrow money. Through initiatives like postponing payments in pension schemes, which were not immediately required to be paid to the beneficiaries and better tax receipt, the American treasury managed to find some money for the government's expenditure. This money is, however, expected to run out in the first week of August. After this, the American government will have no money to spend while it is also not allowed to borrow more money, hence the crisis.
Why can't the US Government borrow more money?
In America, the government faces a limit on the total amount of debt it can accumulate. The debt ceiling or the legal limit on government borrowing is set by a statute and hence can only be raised by Congress. The system was introduced during the First World War. Prior to 1917, the year when the US entered the war, every government borrowing was required to be approved by Congress. To allow more flexibility in the system, it was decided that a maximum limit of the government's gross debt would be fixed and the government could borrow money without Congressional approval if the total debt was within this limit. Over the years, the ceiling has been raised several times and at present it is fixed at $14.3 trillion, which the American government has already reached.
Why is Congress not raising the ceiling?
Over the years, the ceiling has witnessed several raises and the people who are opposing any further increase argue that the present situation, where the national debt has reached its highest point in 50 years, is the outcome of these hikes. A large proportion of the current debt has been accumulated over the past 30 years, starting with the Reagan regime. There is also an ideological debate on the methods of repayment of the debt. The conservative Republicans are arguing for reducing government expenditure by discontinuing certain schemes. The liberal Democrats, on the other hand, want to continue the welfare policies and raise the money through increased taxes. Considering the upcoming presidential elections, none of the parties can afford to displease their vote banks. It is however assumed that a consensus will be reached and the US government will not actually default from paying its bills.
What will happen if the ceiling is not raised?
Unlike Greece and other European countries which recently witnessed a debt crisis, the US has not seen any significant increase in its borrowing costs. Naturally, the world is willing to lend money to the US and hence the Obama government can ignore the ceiling. But in that case he might face impeachment, as this would be illegal. If he doesn't ignore the ceiling, Obama's government will have to default from paying its bills and repaying the debt. In that case, apart from non-payment to its creditors the government will also have difficulties in paying for its welfare schemes, salaries of its employees and soldiers and the money committed for various infrastructure projects. This might trigger a slowdown as people will not have money to buy goods and services. A default on treasury debt which is raised by selling treasury bills might also result in a financial crisis. These bills are bought by individuals, corporations, banks, insurance firms, local and foreign governments. Non-payment might create a situation similar to the crisis created after the collapse of companies like Lehman Brothers.
In America, the government faces a limit on the total amount of debt it can accumulate. The debt ceiling or the legal limit on government borrowing is set by a statute and hence can only be raised by Congress. The system was introduced during the First World War. Prior to 1917, the year when the US entered the war, every government borrowing was required to be approved by Congress. To allow more flexibility in the system, it was decided that a maximum limit of the government's gross debt would be fixed and the government could borrow money without Congressional approval if the total debt was within this limit. Over the years, the ceiling has been raised several times and at present it is fixed at $14.3 trillion, which the American government has already reached.
Why is Congress not raising the ceiling?
Over the years, the ceiling has witnessed several raises and the people who are opposing any further increase argue that the present situation, where the national debt has reached its highest point in 50 years, is the outcome of these hikes. A large proportion of the current debt has been accumulated over the past 30 years, starting with the Reagan regime. There is also an ideological debate on the methods of repayment of the debt. The conservative Republicans are arguing for reducing government expenditure by discontinuing certain schemes. The liberal Democrats, on the other hand, want to continue the welfare policies and raise the money through increased taxes. Considering the upcoming presidential elections, none of the parties can afford to displease their vote banks. It is however assumed that a consensus will be reached and the US government will not actually default from paying its bills.
What will happen if the ceiling is not raised?
Unlike Greece and other European countries which recently witnessed a debt crisis, the US has not seen any significant increase in its borrowing costs. Naturally, the world is willing to lend money to the US and hence the Obama government can ignore the ceiling. But in that case he might face impeachment, as this would be illegal. If he doesn't ignore the ceiling, Obama's government will have to default from paying its bills and repaying the debt. In that case, apart from non-payment to its creditors the government will also have difficulties in paying for its welfare schemes, salaries of its employees and soldiers and the money committed for various infrastructure projects. This might trigger a slowdown as people will not have money to buy goods and services. A default on treasury debt which is raised by selling treasury bills might also result in a financial crisis. These bills are bought by individuals, corporations, banks, insurance firms, local and foreign governments. Non-payment might create a situation similar to the crisis created after the collapse of companies like Lehman Brothers.
What could be “Global Impact”?
Any bad news from the western countries, directly impact all the countries because most of the countries heavily depend on the US for import and export. For instance, China is the largest exporter for US. If any slow down on the economy would directly impact the China’s exports and it would collapse their GDP growth. US consumers has the highest spending habits, there are no other country to replace the USA at any time. So, the impact can not be avoided and every one has to go through the tough times ahead.Guest Post by Jatinder
INTERPRETATIONS
STINGERS - A TEAM WITH RENEWED SPIRIT AND DETERMINATION
How this name sounds ...
Is this the bee that stings or is it the name of a missile.... shot by Indian Army during Kargil war...
But how often we come across this name that has been adopted by a group of enthusiasts who have bunched to form a formidable side ready to take on the challenges from any other team...
The CARROM Championship sets the right mood......
Life is like a roller coaster. It has its ups and downs. But it's your choice to scream or enjoy the ride.
What a time to show the prowess.. A few shots and zoom into the next round ....
We take the challenge....
How this name sounds ...
Is this the bee that stings or is it the name of a missile.... shot by Indian Army during Kargil war...
But how often we come across this name that has been adopted by a group of enthusiasts who have bunched to form a formidable side ready to take on the challenges from any other team...
The CARROM Championship sets the right mood......
Life is like a roller coaster. It has its ups and downs. But it's your choice to scream or enjoy the ride.
What a time to show the prowess.. A few shots and zoom into the next round ....
We take the challenge....
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