All you want to know about the US debt crisis

Is the US heading towards another financial crisis?

Although it might be a bit early to predict with certainty the future implications of the debt crisis facing the US today, the situation is fluid enough to raise an alarm for theUS governmentas well as foreign investors. Because of the recent financial crisis and the ongoing war on terror, the tax revenues of the US government shrunk while its expenditure increased. Consequently, there was a substantial increase in the government's deficit. In May 2011, the US government reached the legal limit of its ability to borrow money. Through initiatives like postponing payments in pension schemes, which were not immediately required to be paid to the beneficiaries and better tax receipt, the American treasury managed to find some money for the government's expenditure. This money is, however, expected to run out in the first week of August. After this, the American government will have no money to spend while it is also not allowed to borrow more money, hence the crisis.

Why can't the US Government borrow more money?

In America, the government faces a limit on the total amount of debt it can accumulate. The debt ceiling or the legal limit on government borrowing is set by a statute and hence can only be raised by Congress. The system was introduced during the First World War. Prior to 1917, the year when the US entered the war, every government borrowing was required to be approved by Congress. To allow more flexibility in the system, it was decided that a maximum limit of the government's gross debt would be fixed and the government could borrow money without Congressional approval if the total debt was within this limit. Over the years, the ceiling has been raised several times and at present it is fixed at $14.3 trillion, which the American government has already reached.

Why is Congress not raising the ceiling?

Over the years, the ceiling has witnessed several raises and the people who are opposing any further increase argue that the present situation, where the national debt has reached its highest point in 50 years, is the outcome of these hikes. A large proportion of the current debt has been accumulated over the past 30 years, starting with theReaganregime. There is also an ideological debate on the methods of repayment of the debt. The conservative Republicans are arguing for reducing government expenditure by discontinuing certain schemes. The liberal Democrats, on the other hand, want to continue the welfare policies and raise the money through increased taxes. Considering the upcoming presidential elections, none of the parties can afford to displease their vote banks. It is however assumed that a consensus will be reached and the US government will not actually default from paying its bills.

What will happen if the ceiling is not raised?

UnlikeGreeceand other European countries which recently witnessed a debt crisis, the US has not seen any significant increase in its borrowing costs. Naturally, the world is willing to lend money to the US and hence the Obama government can ignore the ceiling. But in that case he might face impeachment, as this would be illegal. If he doesn't ignore the ceiling, Obama's government will have to default from paying its bills and repaying the debt. In that case, apart from non-payment to its creditors the government will also have difficulties in paying for its welfare schemes, salaries of its employees and soldiers and the money committed for various infrastructure projects. This might trigger a slowdown as people will not have money to buy goods and services. A default on treasury debt which is raised by selling treasury bills might also result in a financial crisis. These bills are bought by individuals, corporations, banks, insurance firms, local and foreign governments. Non-payment might create a situation similar to the crisis created after the collapse of companies likeLehman Brothers.

source: TOI