U.S. hits Debt Ceiling on May 16, 2011

U.S. National Debt as at 21/06/2011:-

U.S. hits Debt Ceiling on May 16, 2011.  The difference between Greece Debt Crisis and recent U.S. Debt debate is, the Greece unable to pay the bills and the U.S. degress of willingness to meet its obligations.

What is Debt ceiling?

According to Sahadi (CNNMoney, 2011), debt ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare.

What is the debt ceiling limit right now?

The Bureau of the Public Debt stated that the debt ceiling limit is set at $14.294 trillion now. However, the United States’ accrued debt hit that mark on May 16 this year.

How if Congress fails to raise the debt ceiling before Aug 2?

U.S. treasury would not have authority to borrow any more money.  The alternative solutions to this situation are to raise the debt ceiling or to pay interest due to bondholders or to cut spending & raise tax. However, total income (government revenue minus government spending) is not enough pay interest to all of its bondholders. That means U.S. treasury will have to pick and choose who to pay and who to put off every day.  Potential default is still assist because U.S. won’t be able to pay all the country’s bills & meet its debt obligations if the lawmakers do not increase the debt limit.

The Standard & Poor’s is threatening U.S. by downgrade the credit outlook from “stable” to “negative” if Congress fails to raise the debt ceiling limit by Aug 2.  Currently, The U.S Debt is rated AAA by Standard & Poor’s,  acknowledged as one of the safest investment in the world today. It is the reason why  the rest of the world willing to buy the U.S. securities for 14.3 Trillion.

If U.S. default, the consequences are so great and even greater than the 2008 financial crisis & 1997 Financial crisis. Personally, I don't think the U.S. will let it happen. However, the deadline is approaching and Congress yet to finalise the decision.  The tension is growing everywhere as the deadline is approaching.

Why the U.S. Treasury Bond is in high Demand?

The reason of the Triple A rating by S&P is mainly backed by the U.S Economy, still the largest in the world despite weak economic recovery, demands of US dollar in international market for trading purposes, the loose debt controlling policy, and the U.S. is still the world largest exporter in the world.

Why the Congress not just raise the Debt Ceiling?

The most recent time the debt ceiling was raised was in February 2010. In fact, debt ceiling was raised almost 10 times since 2001 & almost 100 times since 1940. The Congress is arguing on the alternatives whether to raise the debt ceiling again or to cut spending & raise taxes.

Some congress members urge to slow down the accumulation of debt by suggesting budget changes. They realized that if they raise the debt ceiling once again, the U.S economy will be a step further to the "black hole". 

Budget changes can be cut government spending, raise individual and corporate taxes, reduce military funding, cut social benefit funding, etc.. By doing so, the government can increase its net budget position and reduce the dependence on borrowing by selling securities. But why the congress always chosen to raise debt limit instead of budget changes in the past 10 years?

Don't forget, political dispute is one of the factor to this problem. How the Republican and Democratic party reflects to gain votes in the coming election? The congress decision in either ways will definitely affected the next election result.

What are the impacts if Congress chosen to cut spending or to raise tax?

The weakening U.S. economy can't affords the decision  either spending cut or tax raise. These actions will further bring down the pace of economy recovery in the U.S. or even turn the GDP figure into negative.

The U.S. federal spending mainly focus on medicare (23%), social security(20%) and defence department (20%). These 3 elements made up 63% of total spending. The Congress, either Republican or Democratic party, can't afford the consequences of cutting funding of medicare and social security. The U.S. people will not accept the reduce funding in these 2 areas. Moreover, the U.S. government also can't simply reduces the military funding, especially in this unstable world situation includes Libya political dispute, growing nuclear tension around the world and the military power in China.  In order to keep it world No.1 position in the world, the U.S. will need to continuously spend money in its military department.

If the government chosen to raise taxes, in economy theory, the individual disposable income will be lessen and people have lesser money to spend in the market. The corporate will have lesser money for investment. The GDP figure will be affected badly. If the U.S economy slow down, the rest of the world economies will follow its footstep because being the world largest consumer cutting its spending, means decreasing demands of goods & services in interntional market. In conclusion, if the purchasing power of American reduces, the world economy will be affected badly, espeially for countries rely much on trading with the American.