The US Debt Ceiling - Term Paper Example

? The U.S Debt Ceiling The U.S Debt Ceiling The U.S. debt ceiling is a lawful method of restricting the amount of national debt, which can be issued by the American Treasury (Levit et al., 2013). It is also known as the debt limit (Abotalaf, 2011). The debt limit is an aggregate amount that is relevant to gross debt, which incorporates debt in the hand of intra-government, as well as public accounts. Almost 0.5% of United States debt is not covered by this ceiling. Since government expenditures are legalized through a separate law, the debt limit does not openly restrict government debits (Abotalaf, 2011). In essence, it can just limit the Treasury from settling expenditures once the limit has been achieved, but which have already been permitted and appropriated. When the debt limit is normally reached devoid of any raise in the limit having been passed, the Treasury has to use extraordinary measures to provisionally fund government expenditure and responsibilities till a resolution can be reached. The U.S. Treasury has never, in the past, reached the level of wearing out extraordinary actions, leading to a default, even though the Congress, on a number of occasions, seemed like it would permit a default to occur (Masters, 2013). Managing of the U.S. public debt is a significant aspect of the macroeconomics of the country’s financial system and economy, and the debt limit is a restraint on the Treasury’s capacity to run the United States economy (Abotalaf, 2011). However, there are talks on how the U.S. financial system should be controlled, and whether a debt limit is a suitable method for restraining government expenditure (Abotalaf, 2011). This paper will discuss the consequences of debt ceiling in the United States economy, how the country got there and how they can get out of it. What the United States Got to the Current Debit Ceiling In Article I, Section 8 of the American Constitution, only the Congress can consent to the loaning of money by the United States on credit (Levit et al., 2013). From the independence days of the U.S. till the early 90’s, the Congress openly consented to every singled debt issued (Masters, 2013). To offer more elasticity to support the U.S.’s involvement in the First World War, the Congress modified the technique through which it legalized debt in the 1917, 2nd Liberty Bond Act. Under this law, the Congress created a summative limit also known as a “ceiling”, on the overall amount of fresh bonds, which could be issued (Austin et al., 2012). The current debt limit is a summative limit relevant to almost all national debt, which was significantly created by the both the 1939 and 1941 Public Debt Acts that have consequently been amended to transform the limit amount (Abotalaf, 2011). From time to time, political disagreements occur when the Treasury informs the Congress that the debt limit is almost to be reached (Masters, 2013). When the debt ceiling is achieved and pending a raise in the limit, the Treasury can use "extraordinary measures" to seek extra time before the limit can be increased by the Congress (Austin et al., 2012). The U.S. has never got to the level of a default where the Treasury was not able to pay United States debt requirements, even if it has been close on a number of occasions. The only exemption was in the 1812 War when a number of areas in Washington D.C., and also the Treasury, were burned to the ground (Levit et al., 2013). The U.S. reached, in 2011, a crisis level of close to a default on public debt. The holdup in raising the debt limit led to the initial downgrade in the U.S. credit ranking, a quick plunge in the stock market, as well as a raise in borrowing expenditure. Another debt limit crisis developed in early 2013 when the ceiling was reached once more, and the Treasury assumed extraordinary measures to evade another default (Levit et al., 2013). The 2013 debt limit crisis was settled, for now, on 4th February, 2013, when the President consented to the No Budget, No Pay Act and also delayed the debt ceiling till 19th May, 2013. After 19th May, the debt limit was increased to $16.699 trillion, the degree of debt sustained during the deferral, and Treasury went back to extraordinary measures (Austin et al., 2012). Jack Lew, the Treasury Secretary, warned the Congress that these actions would be worn out by 17th October, 2013. On 7th October, 2013, the Treasury pointed out that the debt limit and extraordinary actions will be worn out and that another default will take place on 17th October when interest payments are outstanding (Levit et al., 2013). The procedure of deciding the debt limit is different from the U.S. budget process. Therefore, increasing the debt limit neither straightforwardly enhances nor drops the budget debit and vice versa (Masters, 2013). The debt ceiling does not limit or control the capacity of the national government to manage deficits or gain responsibilities. Instead, it is a restriction on its capacity to pay requirements already gained (Levit et al., 2013). The President prepares a national budget each and every year, which the Congress is obliged to pass, at times with amendments, in a coexisting resolution that does not need the President's consent and is not legally binding (Austin et al., 2012). The budget specifies anticipated tax collections and costs, and; hence, specifies the sum of borrowing the United States government would have to do in that financial year (Masters, 2013). In 2011, the House of Republicans utilized voting against the debt limit as a bargaining chip to ease government expenditure, which brought the damaging requisition cuts that the United States faces today (Levit et al., 2013). Currently, one section in the House of Representatives, mostly members of the Republican Party, is risking the credit of the U.S. not unless their extensive list of partisan policy requirements is fulfilled (Austin et al., 2012). This list comprises of postponing the Obamacare, also known as Affordable Care Act, gutting environmental principles, and repairing the tax code (Levit et al., 2013). However, President Obama has made it obvious that he will not agree on risking the full faith, as well as the credit of the U.S. On 14th January, 2013, in a media conference held by President Barack Obama, he stated that not increasing the debt limit would lead to delays in payments, as well as benefits of government employees' salaries. He also stated that by not increasing the limit would lead to a default on government deficit (Levit et al., 2013). The President urged the Congress to increase the debt limit devoid of any conditions to avoid another default such as the 2011 default by the U.S. on government debit. Increasing the debt limit was also supported by the leader of the Federal Reserve, Mr. Ben Bernanke (Austin et al., 2012). Effects of the U.S. Debt Ceiling A majority of economists in the United States, including the ones in the White House and from former governments, argue that the effect of an utter government default would be extreme (Ahuja, 2013). Ben Bernanke, the Federal Reserve leader, said that a deficit would be a recovery-ending process, which could most probably cause another financial crisis (Levit et al., 2013). Short of a default, economists warn that legislative holdups in increasing the debt ceiling could also impact vital harm on the economy (Ahuja, 2013). A number of analysts argue that congressional standstill over the debt ceiling will most probably sow considerable doubt in the bond markets, as well as place uphill pressure on interest rates. Rate raises would not just raise future borrowing costs of the national government, but would raise capital expenses for stressed United States firms and cash-strapped homebuyers (Austin et al., 2012). Furthermore, rising rates could avert future taxpayer money away from much required national investment in areas such as education, infrastructure, as well as health care (Levit et al., 2013). The politically protracted acrimonious debt ceiling showdown, in 2011, encouraged Standard and Poor (S&P) to take extraordinary steps to downgrade the U.S. credit ranking from its triple-A level, which critics fear that such and endeavor could cause comparable moves from other rating agencies (Masters, 2013). In the past, the United States Treasury market has been persuaded by large investments from surplus nations such as China and Japan, which perceive the United States as the world’s safest nation to store their savings. A research conducted by Congressional selected experts in 2011 suggested that a loss of assurance in the debt market could make international creditors to discharge huge fractions of their holdings, and; therefore, persuade others to do so (Levit et al., 2013). This will also cause a drop on the dollar at foreign markets (Ahuja, 2013). Financial markets might suffer considerable volatility and suffering, and spreads between corporate bonds and T-bills could narrow (Levit et al., 2013). Treasuries have by now decreased in value making the yield to go up, as it has attained 2.92%, which is a reaction to the developing disagreements between the two political groups on the debit plan. Abotalaf (2011) considers that the demand on U.S. bonds might lessen and, thus investors can switch to EURO-denominated bonds with the declining dollar against the EURO (Austin et al., 2012). Products, in contrast, are anticipated to go up if the United State defaults. Gold prices have improved due to the United States deficit insecurity, though they are anticipated to drop if the deficit plan is accepted (Levit et al., 2013). Whereas many United States exporters would gain from dollar downgrading since it would enhance foreign demand for their products by making them less expensive, the same organizations would also bear greater borrowing costs from growing interest rates (Ahuja, 2013). A likely long-term worry of some United States officials is that constant instability of the dollar will increase force to current calls by the global community for a conclusion to its rank as the world's reserve currency (Ahuja, 2013). Also, other markets will suffer should the United States defaults on its responsibilities. It is worth bearing in mind that China is the main foreign investor in the U.S.’s Treasury; therefore, the default will have a harmful consequence on China (Levit et al., 2013). The same issue applies to other nations, which are exposed to T-bills and United States bonds (Ahuja, 2013). Whether the United States defaults or not, these nations will suffer from the drop of the dollar because they drop will depreciate the value of their ventures. How to Get Out of the Debt Ceiling Affiliates of the Obama Government have argued that not increasing the debt limit would lead to harsh consequences (Levit et al., 2013). Mr. Geithner, an ex-Secretary of the Treasury constantly confirmed that not enhancing the debt ceiling would cause severe harm to the United States economy, as well as the livelihoods of all Americans (Ahuja, 2013). This is because the United States will no longer be in a position to cater for its obligations. President Barack Obama has also constantly argued that the debt ceiling should be raised and he will not debate on this matter. According to the Head of State, Americans are not leverage to be used (Ahuja, 2013). The credit and full faith of the United States is not a bargaining chip (Levit et al., 2013). The House Speaker, John Boehner, has urged that the debt ceiling should not be raised devoid of spending cuts or reforms higher than the amount of the raise. Economists have shown concern about the current level of the national debt. Nevertheless, they mainly argue that the amount would be akin when the debt ceiling is not raised (Masters, 2013). Ben Bernanke, head of has argued that the Congress should endeavor to put a plain in place, which would lower the national debt (Levit et al., 2013). He further went ahead to state that not increasing the debt ceiling could eventually bring the nation to a default, which will also lead to hazardous consequences for the economy, as well as the financial system of the United States. International investors are already nervous about United States’ ability to reach a political consensus to deal with the country’s fiscal disputes. Therefore, a prolonged debate over the debt limit would be extremely counterproductive (Ahuja, 2013). The current state of affairs remains vague until policymakers arrive to an accord concerning the debt limit, as well as the deficit plan. Some nations are certain that the United States will not default because of its strong financial reputation, but fears concerning its triple-A credit level are still present (Levit et al., 2013). There are a number of plans intended to conquer the debit, but until now, most of these intentions have not be supported by a majority voting of the policymakers, and; therefore nothing has been accepted about the debt limit. Abotalaf (2011) believes that a likely downgrade will most likely hit the United States soon, mainly if nothing is changed. Conclusion The U.S. debt ceiling is a lawful method of restricting the amount of national debt, which can be issued by the American Treasury. It is also known as the debt limit. The debt limit is an aggregate amount that is relevant to gross debt, which incorporates debt in the hand of intra-government, as well as public accounts. The debt limit is a very important factor to the United States economy, and since this is a world renowned economy, if it reaches a default, then a majority of the world stands to lose since U.S. is considered to control 35% of the world economy. References Abotalaf, A. (2011). The US debt crisis. Retrieved from http://www.capstandards.com/CSR_USDebtCrisis_26Jul2011.pdf Ahuja, G. (2013). The debt-ceiling crisis: Why it matters to millennials. Retrieved form http://www.americanprogress.org/wp-content/uploads/2013/10/MillennialDebtCeiling-5.pdf Austin, D. et al. (2012). The debt limit: History and recent increases. Washington, DC: Congressional Research Service. Levit, M. R. et al. (2013). Reaching the debt limit: Background and potential effects on government operations. Washington, DC: Congressional Research Service. Masters, J. (2013). U.S. debt ceiling: Costs and consequences. Retrieved form http://www.cfr.org/budget-debt-and-deficits/us-debt-ceiling-costs-consequences/p24751#p6 Read More