American Debt Ceiling
Table of Contents :
Debt Explained
Growing Debt
Risks Involved
Abolish it
Public Reaction
My perspective
Disclaimer.
Are you worried about US debt ceiling crisis that is causing lot of uncertainty and risks in the financial markets.
I am optimistic very soon a compromise will be worked out politically like always, so lets explore more about this crisis.
Debt Explained
The US national debt stands at over $31T, which is the total amount of outstanding borrowing by U.S. Federal Government accumulated since nation’s inception.
In nutshell, US government has borrowed this amount to cover expenses incurred over time when there is a budget deficit.
Reasons for reduction in govt revenue could be many, like reduced tax collection from individuals or corporations.
This national debt enabled US federal government to pay for important programs and services even if there is a shortage of funds.
Practically major expenses like Social Security national defense Medicare etc can’t be stopped, so govt has resorted to deficit spending by increasing its borrowings.
Growing Debt
The U.S. has been carrying debt since its inception, but rose sharply during times of great depression.
From a debt of $65 million in 1860, after World War I it went past over $22 billion.
But events like Afghanistan and Iraq Wars, 2008 Recession and lately COVID-19 pandemic slowdown, inflated debt to over $31T.
Ratio of debt to GDP is considered a good indicator of a country’s fiscal health, than a debt number because that shows country’s ability to repay.
In 2013, U.S. debt to GDP ratio surpassed 100% while debt was $16.7 trillion, but shot to over 125% in 2022 while the debt went past $31T.
Risks Involved
As we reach a debt ceiling global financial markets become more jittery .
Surely this will have a negative effect on US economy in the worst case scenario, as credit rating of US debt might be at stake.
The last thing govt wants is to pay more in interest payments when rates are on the rise, that too when federal debt has ballooned.
Furthermore, there is delicate political dance being played out where both parties don’t want too concede too much, thus keeping their political capital intact.
But White House economists have projected that a debt default could cost up to 8 million jobs, and could be catastrophic for US stock market.
Abolish it
With recent standoff over raising the debt ceiling yet another time, there is a fear of US defaults on its debt obligations.
Only the US Congress has the legal power to raise this debt ceiling, and every time this happens financial markets go in a crisis mode, thus leaving investors and economy in a very precarious situation.
After lot of political back-and-forth, eventually Congress will raise this ceiling which has happened too often in the recent past.
Some economic analysts are proposing a simple solution to permanently solve this problem, just scrap the debt ceiling.
Even some of lawmakers think it could be a good idea, which will remove one more uncertainty from financial markets.
Public Reaction
The latest poll by Washington Post done last week found, that Americans would blame equally both Republicans and the President in the event of a debt ceiling crisis
We all are well aware about financial repercussions if US govt is unable to honour their debt obligations, especially when US dollar is world’s reserve currency.
Although the polls are never accurate, but gives an idea how general public at large is thinking.
The federal employees will be impacted first, but I believe Americans are not fully aware about consequences of a US default, both on US as well as the world economy.
Lastly the cost of borrowing for Americans will increase for ever.
My perspective
Yet again America has hit its debt ceiling, and the White House is calling for increasing limit on federal borrowings.
The US debt has reached $31.4 trillion which is not a small amount by any stretch of imagination, but this is not the first or the last time US has done it.
In my limited wisdom, its is just a technicality which gives politicians to go back and forth and score brownie points.
Financially, treat it as a rollover of debt where you borrow now to pay for old debt, that has reached over 120% of US GDP.
Practically US will never be able to repay its debt, rather it’s like paying a minimum on your credit card if that makes sense.
Disclaimer :
As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.