Worlds Leaders Press the United States on Fiscal Crisis - Article Example

The country’s key economic partners, for example, China, are worried about the economic situation in the United States. If the United States would not revise its debt ceiling, the global economy would slow down in terms of growth. This is because the United States is a key consumer of goods produced across the world. It is as well a key supplier of goods.

Failure by the U.S to review its national debt ceiling would mean that the level of consumption within the economy would go down. In turn, this would adversely affect the economy in terms of economic growth. Failing to raise the national debt ceiling would lead to the country defaulting on its financial responsibilities i.e. financing the recurrent expenditure. Defaulting would adversely affect the country’s credit rating. This is because of the fact that the risk associated with the government bonds would go up.

Therefore, it would be costly for the economy to borrow in the future. There is a direct relationship between risk and the rate of interest. In other words, when the level of risk goes up, so does the rate of interest. This means that it would be costly for the U.S government to borrow in the future if it will not review the debt ceiling. The country is one of the leading across the world in terms of credit rating. This means that other countries are always willing to lend to the U.S. By raising the debt ceiling the country would be able to meet its short-term financial obligations i.e. payment of wages to its employees.

The country may get back to another financial crisis if it would not review its current debt ceiling. Critique/ analysis It is important for the United States government to review its national debt ceiling. This is not only important in terms of meeting its financial obligations, but also because of the fact that the level of consumption and government expenditure would go up. According to Keynesian economists, there is a positive relationship between consumption within an economy and economic growth.

Therefore, increasing the limit relating to the level of the national debt would substantially contribute to the growth of the economy. Both consumption and government expenditure would go up. Through the multiplying effect, an increase in government expenditure or consumption would result in more than proportionate growth in the level of the gross domestic product. On the other hand, if the government would not review its debt ceiling, consumption and government expenditure would go down, and through a multiplying effect, the GDP would go down by more than proportionate.

The article focuses on the short-term solution to the national debt crisis. However, it does not focus on the long-term solutions to the crisis. Although it is important for the government to revise the ceiling, this would only be in the short run. A long-term solution to the U.S. problem would be important to the country because it would prevent the problem from recurring. One of the long-term solutions would be cutting the budget deficit gradually. 

In other words, it would be important for the government to lower its budget deficit. This is because one of the key reasons why the national debt level goes up is the fact that the U.S. economy’s budget deficit is ever-growing. By the government cutting its expenditure on unproductive activities, the budget deficit would go down, which is a long-term solution as far as the debt ceiling is, concerned.

Although the paper reflects on the consequences of the failure of the U.S. government to revise its national debt ceiling upwards i.e. the increased cost of borrowing, it does not explain the relationship between the two i.e. failure to raise the ceiling and the high cost of capital for the government of the United States. The cost of borrowing would go up because the risks associated with the U.S. bonds would go up. The risk would go up if the government would fail to meet its financial obligations because of the debt limit. Therefore, in the future, no single country would be willing to lend to the U.S. government. Countries would only be willing to lend to the government if the rate of interest is high enough to compensate for the higher risk associated with its securities.