The USA debt ceiling crisis is the perfect recipe for an economic blunder, it is a ramification of political polarization which turned the government’s fiscal responsibility into a calamity in no time! So what actually happened? What is the debt ceiling? Why has it been the talk of the town?
Well, the US government is accountable for higher expenses than the money it collects via taxes, so to even out this difference, they opt for borrowing, i.e. debt. How do they do so? To stir the money in the US economy and mask it at the same time, they do it via bonds, these government bonds are considered to be one of the safest and reliable investments for the general public. This accounts for the explanation of debt, so what is the ceiling?
In 1993, the Congressmen coined the term “ceiling” to aggregate a limit on this borrowing. Many a time this upper limit cap has been lifted so that more money can be easily borrowed by the government. However, in 2013, when the country was in serious danger of going over the debt cliff, republicans blocked then-president Obama’s (a democrat) plans. But like always, the lawmakers backed off just in time. And as we all know, history repeats itself, here we are back again talking about it.
Let us understand more about the USA debt ceiling crisis:
The current national debt of the USA is nearly $28.43 trillion, and the cap that was set for this was $ 28.4 trillion. The possibility of a small wiggle is what makes the decision even more complicated.
Must Read – How is china’s Evergrande crisis affecting the global market?
Why does the USA need to limit its borrowing?
Well, the congressmen had to authorize these borrowings every time, the limit was invented so that the treasury could avoid seeking permission to raise the funds until the breach of limit.
Now the borrowers (democrats) want to ensure that the upper limit has been raised as this will help them to meet their long-term goals, however, raising these debt limits is not very easy.
For years now, this raising of limits was a normal thing, however, it has now become more of a crisis sprinkled with political polarization. Earlier this limit was raised by passing a budget resolution, however, in 2011, there was an argument that the President can unilaterally lift the limit for the safety of the country but Obama and his lawyers disagreed with it, making the passing of a budget resolution necessary.
What happens if the debt ceiling is not raised?
For the first ever time, the country will default on its debts, this may happen by Mid-October. If this happens, all the welfare programs run by the country will be currently put on halt. According to a report by the Golden Sachmans, the treasury will have to press pause on nearly 40% of the expected pays given to US households in form of financial aid.
In addition to this, the un-raising of the ceiling will trigger a good spike in the interest rates and damage the creditworthiness of the country, thereby making it the most expensive place to live. Another plausible outcome of this could be a staggering effect on the stock market of the country.
The USA debt ceiling crisis will be a domino effect damaging the globe’s economic stability. With the growing ambivalence in the USA bonds, all the investors may sell off their bonds depreciating the USA currency- dollar, which has been functioning successfully as the world’s reserve currency until now.
What is the status of negotiations to raise the debt ceiling?
Well, the Democrats have been in full power to make it happen, as they control both the houses, however, they will still need a vote of 10 republicans to pass the budget resolution. And as of now, it seems like the opposition is signing off and will not be going ahead with the democrats. According to IMF (International Monetary Fund), the USA should end the debt cap as a concept and opt for an alternative long term, flexible solution.
The debt ceiling as of now is a black box, however, the risk of accidental default is going to overpower the fiscal responsibility that it would have encouraged in the first place.
And according to the Bipartisan Policy Centre, Treasury will run out of cash sometime between the mid of October to early November. Although it is more difficult to be certain about the so-called “X-date”, as currently the government is giving away all the pandemic relief money and there is a big question mark on how much tax revenue will be coming in this fall.
The raise on this debt ceiling will have many rounds to discuss until we close on it. They may opt for a new mechanism in place or just like Denmark raise the cap so high that the debate is out of the question for the foreseeable time.
All we agree to is the quote of Noam Chomsky-” “The debt is being cynically exploited by the far right, with the collusion of the Democrat establishment, to undermine what remains of social programs, public education, unions, and, in general, remaining barriers to corporate tyranny.”