Debt Ceiling Issues - Essay Example

? Debt Ceiling Debt ceiling is the limit to which debts can be borrowed. The debt ceiling as perceived in the United States is the maximum amount of debt that can be borrowed by the United States in order to run its operations. The process through which debt is borrowed by the government is by issuing bonds. The government issues bonds in order to raise the debt and the holders of such bonds hold the position of a creditor. The bonds have a date of maturity and a rate of return, and these are held by individuals or organizations as available for sale as well. Due to the application of debt ceiling, there is a limit to the amount borrowed by the United States through such bonds, which means the overall deficit in the federal budget cannot exceed the debt ceiling therefore it can be said the overall spending of the government is limited to the extent of the debt ceiling. The topic of debt ceiling was selected because it holds significant importance in the current economic situation of the United States. After the recent debt ceiling crisis and the impacts of this crisis on the overall economy of the United States, the understanding of the concept of debt ceiling holds significant importance. The following paper would consider the importance of debt ceiling in the economy of the United States, the impact of debt ceiling on the economy of the United States and whether the application of debt ceiling is necessary.Before the debt ceiling was created in the United States, the President was free to make decisions regarding the overall borrowings by the US. The debt ceiling was created in 1917 in order to ensure the accountability of the debt borrowings by the US. Debt ceiling is important for the economy of the US in a number of ways. Following are some of the important aspects of the debt ceiling. In the presence of the debt ceiling, the regulatory authorities that are given the responsibility of assessing the need to borrow money would make their decisions after considering the debt ceiling. There would be control on the overall borrowings made by the United States. In the absence of the debt ceiling, the borrowings may spiral out of control in the wake of the ever increasing budget deficits and government spending, however in the presence of debt ceiling the scenario remains somehow under control. The debt ceiling does not only keep the overall borrowings in control but there are a number of other economic factors linked with borrowing that also come under control due to the debt ceiling. When the debt ceiling is reached while determining a budget, the regulatory authorities can use ‘extraordinary measures’ to raise the required finances in order to remain under the debt ceiling. Such extraordinary measures are not considered unless there is a genuine need to raise the finances such as for saving a part of the government to shut down. There is a limit to the amount of funds to be raised through such ‘extraordinary measures’ and if the regulatory authorities remain unable to raise the required amount of funds through such measures as well, a rise in the debt ceiling is considered.The debt ceiling also influences the extent of government spending. In the presence of debt ceiling, there would be a control over the government’s decisions regarding spending on its operations. Excess government spending may result in increased deficit in the budget. Since the deficit in the budget and government spending influence the overall economic activity in the country, it may lead to a steep rise in inflation in the country. Thus, debt ceiling is important to keep an active control over the borrowings made by the US and the spending made by the government.The debt ceiling is also important because it keeps the federal budget of the United States under control. The debt ceiling keeps the regulatory authorities from exceeding the borrowing limit and in order to meet the deficits in the budget, other measures are resorted to. In the recent past, the debt ceiling has caused a significant stir in the economy due to the increasing budget deficits in the United States. Even though there are a number of important aspects of the debt ceiling, it is being viewed as harm to the economy since there are not many venues other than borrowing available to be sought by the regulatory authorities in order to meet the budget deficits.Due to the increasing budget deficits and debt ceiling, consumers and investors are anticipating a downturn in the economy and the investment activity has also been impacted due to the recent debate regarding the debt ceiling. Therefore, it can be inferred that debt ceiling is important for keeping the deficits in the federal budgets in control but in case of necessary spending, debt ceiling may prove to be a hindrance. Debt ceiling has a significant impact over the federal budget and the extent of government and these two factors are the most important constituents of the overall economy therefore it can be said that the debt ceiling has a significant impact on the overall economy. Following are the impacts of the debt ceiling on some of the factors of the economy.The rate of inflation prevailing in a country depends upon a number of factors, such as; the overall government spending, the investment activity in the country, the interest rates and the overall consumer spending. Since the debt ceiling directly influences the overall government spending, it can be said that debt ceiling also impacts the rate of inflation. If the government is allowed to make borrowings without any limit, the budget deficit and spending may rise to such a level that may cause a hike in the rate of inflation. Therefore, it can be said that debt ceiling keeps the rate of inflation prevailing in the country under control as well.Interest rates prevailing in a country are the main determinants of the extent of economic activity. If the regulatory authorities decide to bring the level of inflation down, they might increase the interest rates in order to reduce the overall economic activity in the country. While, if the regulatory authorities determine to increase the economic and investment activity in the country, they may reduce the interest rates. If the national deficit and debts increase to a very high level, they may lead to reduced national savings and higher interest rates and resultantly lower investment activity. Therefore, by keeping the overall deficit and debt controlled, the debt ceiling helps the government in maintaining acceptable level of interest rates. Since all the elements of an economy are interconnected, a change in one influences the other in one way or the other. Any one aspect of the economy cannot be kept isolated from the other aspect. Any change in any aspect of the economic activity influences other aspects as well. Since the debt ceiling holds significant importance in the economy, it also influences the consumer spending, if not directly, indirectly. In order to keep the deficit in the budget limited to the debt ceiling, the regulatory authorities may opt for extraordinary measures. Such measures may include increasing the overall tax revenue of the country which would mean an increase in the tax rates (Underhill, 2000). Consumer spending is directly impacted by the tax rates. If the tax rates go high, the individuals are left with less dispensable income and therefore they consume less than what they would have consumed had there been no additional tax. Thus, debt ceiling does not only influence the extent of government spending or the federal budget, it also impacts the trend of consumer spending. If the perspective of consumers is taken into consideration, it can be said that debt ceiling has more negative impacts on the economy than positive impacts. The debate regarding the good and bad aspects of the debt ceiling is currently prevalent and this is one of the aspects that do not go in the favor of debt ceiling that it impacts the individuals in a negative way (Patterson, 2011). Even though the debt ceiling play an important role in controlling the government borrowings and spending, it has been raised a number of times. A small change is acceptable since there is a factor of inflation continuously prevailing globally and it keeps depreciating the values of currencies but a large rise in the debt ceiling may be questionable. A large increase in the debt ceiling may be due to a number of factors such as an exponential increase in the government spending due to the initiation of a new spending avenue. If it is seen statistically, the debt ceiling has been raised frequently and by a significant degree since the year 2001 and in the recent past, the rise has been very steep (Francis, 2011). There is a prevailing debt ceiling crisis which has raised a significant debate over the increase in debt ceiling. The deficit in the budget has risen to a point where the extraordinary measures would not be able to cater it and only government borrowing would be the solution to the problem. After it was announced that the borrowing authority of the US would be exhausted, the credit rating of the US bonds was downgraded. This led to an economic crisis which has been termed as debt ceiling crisis. Some of the experts are of the view that since the debt ceiling has been increased so many times, it should be removed altogether.It can be inferred from the evaluation of the importance, impacts and application of the debt ceiling that the increasing budget deficit and government spending have made it difficult for the regulatory authorities to keep a constant debt ceiling. Increasing debt ceiling repeatedly defeats the very purpose of the application of the debt ceiling. The government should assess the importance of debt ceiling and acceptable ways of decreasing the budget deficit and cuts in spending should be sought. Works Cited Francis, Davis. What the Debt Ceiling Means for Consumers. US News, 8 September. 2011. Web. March 27, 2012. Patterson, Scott. The debt-ceiling is taking a toll on the economy. USA Today, 31 July. 2011. Web. March 27, 2012. Underhill, Paco. Why we buy: the science of shopping. Simon and Schuster, 2000. Print. Read More