United States National Debt Ceiling - Assignment Example

 United States National Debt Ceiling Introduction Debt ceiling of United Sates of America is a legislative mechanism to the fix the upper limit of the national borrowing. The whole debt ceiling is issued by the Treasury of the country. Debt ceiling includes intra-government accounts and public debts. Fixing the debt ceiling is a significantly important macroeconomic factor for the country. Debt ceiling does not directly mange the national deficit. Debt ceiling crisis of 2011 was significantly debated topic in the US Congress. The matter was an important subject of substantial political debate in the country. The debate was related with the appropriate level of the Government spending and its impacts on the overall debt and deficit of the country. The crisis was so significant that it affected the US stock market heavily. Prices of the Federal bonds increased like anything and investors were significantly confused about the future economic situations of the world’s oldest democracy. Political fraternity across the country was raising their voices to cut down the governmental expenditures to manage the debt ceiling. Budget deficit was increasing, to tame that deficit debt ceiling was a reactive measure. Due to this economic turmoil, credit rating agency Standard & Poor’s downgraded the credit rating of USA for the first time in US history. Discussion 1. Debt ceiling of 2011: its aim and failure of its measure The debt ceiling of 2011 was introduced to improve the health of the US financial markets. But unfortunately the measure of debt ceiling was not at all beneficiary for the US financial markets. Lower assets prices and the higher borrowing costs had significant impacts on the public spending. People of the country were significantly uncertain related with the fluctuating assets prices and the borrowing costs. They were not willing to spend their money. Credit risk and stock prices volatility were prominent in 2011 and it continued up to 2012. (Source: U.S. Department of Treasury, 2013, p. 2) VIX is a volatility index which is used for measuring the implied volatility in the financial market. During that period of time of debt ceiling that index jumped upwards. It stayed elevated for longer period of time (Irving & Engel, 2011, pp. 34-35). During that period of time investors did not invested their moneys as they perceived the situation as significantly risky. As the market was significantly volatile, investors stored their money as the buffer for the future adverse situations. During that period of time S&P 500 index of equity fell drastically. It was almost 17% down. At that point of time there was no sign of improvement. The index remained on the lower side. The fall in the equity stock had a cascading effect on the household wealth also. Almost 50% of the US household stocks are related with the 401(k) accounts. The downward trends of the equity prices impacted negatively to the household wealth. This trend was evident across the country’s macroeconomic situation. The household wealth reduced drastically it fell by $2.4 trillion. This trend was directly related with the spending of the public consumption. Due to a significant fall in the household wealth, people changed their consumption patterns. Due to the lowering consumption patterns the spending was also less. Consumer spending is accountable for the 70% of the country’s GDP. As the spending was less so it impacted the country’s GDP also. US people invest significant amount of their retirement savings into the stock markets. But due to the lower stock prices and volatile market situation their retirement securities were under serious threats. During the period of 2011 retirement assets reduced by $800 billion. The effects of debt ceiling were prominent in the case of consumers and business confidence as well. According to the study of U.S. Department of Treasury, business confidence and consumer confidence were reduced by 3% and 22% respectively. It was a clear indication that the debt ceiling failed to stabilize the financial markets of the country. The European economic situation and the debate of debt ceiling hampered the confidence of consumers and business in a significant way. (Source: U.S. Department of Treasury, 2013, p. 2) All the above graphs are indicating that the consumer confidence and the optimism related with the business were significantly affected due to the debt ceiling. The graph is also indicating that it took too long to resurrect the situation. All these graphical representations are clearly articulating that by no means Debt ceiling was able to stabilize the financial markets in the country. Over the years the US Treasury has taken substantial debts from the foreign investors to cope with the various financial obligations of the country. In last decade the country has fought two long wars which have compelled the nation to borrow money. This continuous trend of borrowing of money forced the US Treasury to come up with something extraordinary. It was significantly necessary for the country to manage its financial obligations. According to Masters, US reached up to its borrowing capacity by the May of 2013. But the macroeconomic situation of the country was demanding more to meet all the financial obligations. At that point of time the Treasury had to take this kind of decision. On the 20th May 2013 Federal government reached its highest limit to issue debt. Then the Treasury was forced to increase its debt ceiling as it had to pay all the bills. It was extraordinary situation that forced the Treasury to take extraordinary decision to maintain credibility of the country in terms debt (Masters, 2013). To safeguard the Federal spending, increasing the debt ceiling was a reactive option for the US Treasury. But consistent nature of the borrowing lowered the impact of this extraordinary reactive measure. Over the years the Federal Government has failed to cut its expenses. It resulted in the situation of budgetary deficit (Tucker, 2010, pp. 12-14). To avoid the default the Treasury took this decision but this was a temporary makeshift decision. It had failed to stabilize the financial markets of the country. All the above discussions are clearly articulating one fact that the aim of debt ceiling 2011 failed significantly. The decision was unable to bring back the confidence of the financial markets. The uncertain situation continued for longer period of time. The market was significantly volatile and the investors were very conservative about their spending. II. Raising debt ceiling leads to more complicated situation in federal economy Federal debts are comprised of public and intra government borrowing. These two kinds of debts are significantly different in nature. It has made the situation significantly complicated. According to the Austin and Levit, spending patterns of the public and intra government are no way similar with each other. Public spending is significantly higher than the spending of the intra government. So it is quite obvious that the borrowing of the intra government account is lesser than the borrowing of the public accounts. This imbalance of borrowing levels has made the task of raising the debt ceiling a complicated matter. Currently the situation is significantly complicated because Treasury is finding utter difficulties to fix its upper limit of debts (Austin and Levit, 2013). Treasury is finding it very difficult to come up with a proper ceiling for the debt and is frequently being forced to raise their upper limits to manage their several financial obligations. In June 2013 public debt of America was almost $11.901 trillion and intra governmental holdings were $4.837 trillion. This kind of imbalance creates lots complications related with the accounting treatment. Only the public debts are considered as the liabilities in the consolidated finance statement of the Government of USA. Intra government debts are considered as the assets in the consolidated finance statement of the US Government. But in case of Treasury, intra government debts are considered as liabilities. It is a significant complication. Over the years different popular policies have created substantial extra expenses for the government. Popular policies like Social security, tax revenue etc have increased the expenses of the federal government. Social security is an insurance program. In the year 2013 for this program almost $808 billion was paid out in this account. In 2012 this insurance program accounted for $768 billion. It means this kind of popular policy had increased its volume in terms of spending (Austin and Levit, 2013). Obviously extra expenses were incurred. To manage the extra expenses US treasury had to borrow more money. Popular policies have been used as the weapons for gaining popularity. It has created extra expenses. Once the debt ceiling is raised Government Treasury can borrow the money. This decision has created bad financial practices. Instead of cutting their expenses Federal Government goes for more and more popular policies. It urges more and more borrowings. Indirectly this has very negative implications for country’s economy. These kinds of extra expenses are causing higher national debts. Raising the limits of debt is acting as an illusion. Government is spending heavily with the borrowed fund. Whenever crisis is occurring they are increasing the debt limits. In this way situations are worsening day by day. Repaying the debt is getting significantly difficult as the amount of borrowing is very high. The decision of increase in debt ceiling has made the US economy significantly dependent on the borrowing funds. Apart from popular policies decisions like Afghanistan and Iraq wars have increased the expenses of the country. These decisions have forced the nation to raise its debt limits. Continuous borrowing of money has made USA a debt ridden country. It has made the situation more complicated. The situation of US economy was significantly vulnerable. If the debt limit was not increased then it would have been a disaster for the people related with the government services in the country. It would have tarnished the credit image of the United State of America (Masters, 2013). It was utterly important for the Congress to raise the debt ceiling to manage its several financial obligations. It was significantly important to tame the ever-increasing nature of the fiscal deficits. It was important to avoid Federal default. But certainly this kind of increase in the debt ceiling is creating significant complication. It is hampering the nation’s financial commitments. The situation has become so critical that basic financial obligations are getting endangered in the absence of increased debt ceiling. The whole economy is getting significantly dependent on the borrowing funds or debts. It is very difficult for country like USA to manage its fiscal deficit without debt. Due to its huge financial obligations to its government employees and to the global fraternity the nation requires significant amounts of funds. Without debt, arranging the funds for the basic financial obligations is impossible for the country. Here comes the complication. The country is getting debt ridden day by day. (Source: Marthinsen, 2014, pp. 52) The above picture is showing the trends of increases in the debt ceiling. The above trend is not a good sign of the country’s economic situation. Increasing the debt ceiling is becoming significantly necessary as there is very little alternatives are available for the country to meet up its financial obligations. But certainly it is creating lots of complications for the country’s overall economic health. Conclusion Debt ceiling is a significantly important matter as far as the US economy is concerned. The country has long history of taking debts from the different foreign investors. Time to time the country has increased its debt limit to meet the financial obligations. But often the raising of debt limits has not been able to achieve its desired objectives or aims. In 2011 the aim of the debt ceiling was to restore normalcy in US financial markets. But it failed significantly. Confidence level of the consumers and business were low and continuous borrowing made the situation worst. The above paper has clearly articulated that raising the debt ceiling is a reactive necessary action which has serious complications. It has also indicated that the US economy and its financial obligations are over dependent on the borrowing funds and that is why over the year debt ceiling has become a hot topic of debate in the country. Debt ceiling can manage the financial obligations temporarily but it cannot be a permanent solution for a country like USA. References Austin, D. and Levit, M. (2013). The debt limit: History and recent increases. CRS report for congress. Washington: Congressional Research Service. Irving, J. S. & Engel, T. G. (2011). Debt limit: Delays create debt management challenges and increase uncertainty in the treasury market. New York: DIANE Publishing. Marthinsen, J. (2014). Managing in a global economy: Demystifying international macroeconomics. New York: Cengage Learning. Masters, J. (2013). U.S. debt ceiling: Costs and consequences. Council of foreign relations. Retrieved from http://www.cfr.org/budget-debt-and-deficits/us-debt-ceiling-costs-consequences/p24751. Tucker, I. (2010). Economics for today. London: Cengage Learning. United States Department of Treasury (2013). The potential macroeconomic effect of debt ceiling brinkmanship. Retrieved from http://www.treasury.gov/initiatives/Documents/POTENTIAL%20MACROECONOMIC%20IMPACT%20OF%20DEBT%20CEILING%20BRINKMANSHIP.pdf. Read More