us debt ceiling and its impact on the global economy
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8/2/2019 US Debt Ceiling and Its Impact on the Global Economy
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US debt ceiling and its impact on the global economy
Introduction:
The U.S. Treasury has borrowed trillions of dollars over the past decade, much of it from foreign
investors, to help finance two long wars, rescue its financial system, and promote economic
growth through fiscal stimulus. The government must be able to issue new debt as long as it
continued to run a budget deficit--the current shortfall is about $125 billion per month. As the
national debt approached its statutory limit of $14.29 trillion, concern mounted over the
consequences of congressional delay or paralysis in extending the government's ability to
borrow. The United States has never failed to raise its debt limit, and many economists assert
that failure to do so would plunge the government into default and precipitate an acute fiscal
crisis. Lawmakers from both parties concede there are dire consequences associated with a
default, but some Republican members of Congress used the debt limit as a negotiating chip toextract deeper spending cuts and long-term fiscal reforms from the White House.
What is the U.S. Federal debt limit?
The debt limit or "ceiling" sets the maximum amount of outstanding federal debt the U.S.
government can incur by law. This number stood at $14.29 trillion in the spring of 2011.
Increasing the debt limit does not enlarge the nation's financial commitments, but allows the
government to fund obligations already legislated by Congress. Hitting the debt ceiling would
hamstring the government's ability to finance its operations, like providing for the national
defense or funding entitlements such as Medicare or Social Security. Under normal
circumstances, the government is able to auction off new debt (typically in the form of U.S.Treasury securities) in order to finance annual deficits. However, the debt limit places an
absolute cap on this borrowing, requiring congressional approval for any increase (or decrease)
from this statutory level.
The debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised
the cap seventy-four times since 1962. Some analysts contend that by requiring legislative
consent, the debt limit affords Congress some oversight authority and engenders some
accountability in fiscal policy. Historically, opposition parties have often used debt-limit
negotiations to draw national attention to protests of existing policies.
History of US debt Crisis
The following pictures explain the historical data on how the huge debt is accumulated over the
years and the major contributors. The existing debt has been increased quickly after the 2008
financial crisis.
http://www.cfr.org/economics/taxes-debt-growth-tradeoff/p23636http://www.cfr.org/economics/taxes-debt-growth-tradeoff/p23636http://www.thinkplaninvest.com/2008/12/what-is-subprime-crisis/http://www.thinkplaninvest.com/2008/12/what-is-subprime-crisis/http://www.thinkplaninvest.com/2008/12/what-is-subprime-crisis/http://www.thinkplaninvest.com/2008/12/what-is-subprime-crisis/http://www.thinkplaninvest.com/2008/12/what-is-subprime-crisis/http://www.cfr.org/economics/taxes-debt-growth-tradeoff/p23636http://www.cfr.org/economics/taxes-debt-growth-tradeoff/p23636 -
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Implications on the Economy:
Most economists, including those in the White House and from former administrations, agree
that the impact of a government default would be severe. Federal Reserve Chairman Ben
Bernanke has labeled a U.S. default a "recovery-ending event" (WSJ) that would likely spark
another financial crisis. But short of default, officials warn that legislative delays in raising thedebt ceiling could also inflict significant harm on the U.S. economy. Congressional gridlock will
sow significant uncertainty in the bond markets and place upward pressure on interest rates.
Increase would not only hike future borrowing costs of the federal government, but would also
raise capital costs for struggling U.S. businesses and cash-strapped homebuyers. In addition,
rising interest rates would divert future taxpayer money away from much-needed capital
investments such as infrastructure, education, and healthcare.
A shrink in demand for U.S. Treasuries would push down the value of the dollar relative to
foreign currencies. While many U.S. exporters would benefit from currency depreciation because
it would increase foreign demand for their goods, the same firms would also bear higher
borrowing costs from rising interest rates.A potential long-term concern of some U.S. officials is that persistent volatility of the dollar will
add force to recent calls by the international communityfor an end to its status as the world's
reserve currency. A 2010 survey performed by the McKinsey Global Institute found fewer than
20 percent of business executives surveyed expected the dollar to be the dominantglobal reserve
currencyby 2025.Emerging Market Economies (EME) will be affected negatively, but relatively compared to the
other parts of the world, emerging markets will do better and will be considered as safe havens
by investors. Most immediate impact will be the portfolio impact, especially for a lot of countries
which have a lot of assets in US dollars and US treasuries. With the US credit rating
downgraded, countries like China, South Korea, Japan, Taipei and some other Asean countries,and countries that rely on exports will be impacted. This will be the direct effect. The indirect
effect will be on the real estate sector. The depreciation of the US dollar will automatically mean
appreciation of the local currencies and that would be bad news for exports. Also the global
economy is slowing down, especially in US and Europe, which are the traditional markets for
exports , more so for final goods. This will impact the export performance of EMEs.
Downgraded credit ratings will increase the cost of borrowing and will impact the liquidity.
Most experts agree that the potential negative consequences of a debt-limit debacle (FT) are
much greater and far-reaching than that of a shutdown--particularly given the risk of a
government default that would jeopardize the full faith and credit of the United States. Theimpact of a shutdown, while painful to the workers who are furloughed and the citizens who are
temporarily denied certain government services, is limited to the symbolic message of political
paralysis it presents to jittery markets.
Amrit Kumar (u111066)
http://blogs.wsj.com/economics/2011/03/01/bernanke-warns-on-debt-limit-chaos/http://blogs.wsj.com/economics/2011/03/01/bernanke-warns-on-debt-limit-chaos/http://blogs.wsj.com/economics/2011/03/01/bernanke-warns-on-debt-limit-chaos/http://blogs.wsj.com/economics/2011/03/01/bernanke-warns-on-debt-limit-chaos/http://www.treasury.gov/connect/blog/Pages/letter.aspxhttp://www.treasury.gov/connect/blog/Pages/letter.aspxhttp://www.reuters.com/article/2010/06/29/us-dollar-reserves-un-idUSTRE65S40620100629http://www.reuters.com/article/2010/06/29/us-dollar-reserves-un-idUSTRE65S40620100629http://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.ft.com/cms/s/0/2846a0a2-63ae-11e0-bd7f-00144feab49a.html#axzz1JulfUcm9http://www.ft.com/cms/s/0/2846a0a2-63ae-11e0-bd7f-00144feab49a.html#axzz1JulfUcm9http://www.ft.com/cms/s/0/2846a0a2-63ae-11e0-bd7f-00144feab49a.html#axzz1JulfUcm9http://www.ft.com/cms/s/0/2846a0a2-63ae-11e0-bd7f-00144feab49a.html#axzz1JulfUcm9http://www.ft.com/cms/s/0/2846a0a2-63ae-11e0-bd7f-00144feab49a.html#axzz1JulfUcm9http://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.mckinsey.com/mgi/mginews/dollar_reserve_currency.asphttp://www.reuters.com/article/2010/06/29/us-dollar-reserves-un-idUSTRE65S40620100629http://www.treasury.gov/connect/blog/Pages/letter.aspxhttp://blogs.wsj.com/economics/2011/03/01/bernanke-warns-on-debt-limit-chaos/