Background of the United States Debt Ceiling Crisis
Debt ceiling refers to the maximum limit that Congress sets, allowing the government to borrow money in order to meet its financial obligations. Today, the current cap stands at $18.113 trillion. During the United States Debt Ceiling Crisis of 2011, Congress was engaged in political debate, to determine the appropriate amount the government should spend together with its implication on the national debt and deficit. The epicenter of the debate was the need to raise the debt ceiling, which always happened without debate. However, debt limit has been around for almost a century when Congress adopted the Second Liberty Bond Act of 1917. Since 1962, this limit has gone up more than seventy times.
Context of the United States Debt Ceiling Crisis
The US government has its legal obligations, which include Social Security and Medicare, tax refunds, military salaries, among other payments. While this is the case, the debt limit restricts the government against making new spending commitments. This means that with the changing economic trends, the government could get to a point where it cannot meet its full legal obligations.
An important arm, which ensures that the United States debt ceiling crisis does not get out of hand, is Congress. Since 1960, it has taken action 78 times to raise, extend or revise the definition of the government’s debt limit. In most cases, these debates have taken political dimensions even though some myths have begun to surface about the crisis.
Why the U.S debt ceiling crisis matters
The law allows the U.S Treasury to implement extraordinary measures to avert such a financial crisis. Failure to meet principal or interest payments would turn into an economic catastrophe for any government. In May 2011, The Treasury began implementing some of these measures after Congress delayed raising the debt limit. This also happened at the start of 2013.
In a case where Congress does not raise the debt limit, one of the extraordinary measures for the government to take in order to avert a financial crisis, would be cutting down some of expenditure by almost half.
Because of the implication of the debt ceiling on the U.S government and the international economy, its approval requires consent of both houses. While this is the case, Democrats and Republicans have always insisted that raising the debt limit be coupled with measures to tame spiraling debt growth. However, the main cause of disagreement when addressing the United States debt ceiling crisis is striking a balance between taxes and level of spending by the government.
Implications of the United States debt ceiling crisis
If the U.S government was to run out of cash and declare and economic crisis, the effects would go beyond borders and paralyze the global market. With the economy still on a recovery path following the financial crisis of 2007/8, no American wishes for this to happen. The list of those on the receiving end would be too long to account for. Here are some of the victims:
Social Security and Medicare beneficiaries would go hungry for months. This is because the U.S government pays 80 million per month to meet its various legal obligations. Secondly, bondholders would also fill the pinch of a government that is broke. In particular, it would be impossible for the government to pay public investors, including foreign governments. With a troubled bond market, the economic paralysis would spread to the stocks. Share prices would plummet as in August 2011 when a fierce debt-ceiling showdown resulted into a U.S credit downgrade to A-.
Homebuyers and other borrowers would experience tough times. A government without money means that it adopts lower credit ratings. This would result into higher interest rates since most consumers depend on Treasury rates. Lastly, United States debt ceiling crisis would be a burden to taxpayers, which include every American. In fact, maintaining a huge U.S debt would make life more expensive and unbearable.
An analysis of the debt crisis therefore presents a delicate axis upon which the U.S economy hangs. In adjusting the max debt limit, it is important for Congress to consider a wide range of factors. While the government must meet its legal obligations, it must also check on its spending and tame debt growth.
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References:
http://www.treasury.gov/initiatives/Pages/debtlimit.aspx
http://www.pbs.org/newshour/rundown/debt-ceiling-1/
http://www.cfr.org/budget-debt-and-deficits/us-debt-ceiling-costs-consequences/p24751
http://www.ibtimes.com/us-debt-ceiling-crisis-2015-explained-higher-interest-rates-stock-market-crash-dollar-2150886
http://www.npr.org/2015/10/24/451198475/why-you-shouldn-t-stare-up-at-the-debt-ceiling-and-yawn