Layman’s Guide to the US Debt Ceiling Crisis

The ongoing ‘discussions’ or rather political point scoring for raising or not raising the US Debt ceiling, is not doing the US economy or the world much good at the moment.  Increasingly the US economy appears to be jittery, the people are in limbo and some have already lost their jobs as reported in today’s news.

So what exactly is the ‘debt ceiling’? Well it is the limit on the amount the U.S. Treasury is allowed to borrow, without further Congressional authorization, to manage the national debt (the total amount currently owed by the U.S. government). And don’t worry, upping the debt ceiling is not unusual, it’s already been increased 78 times since 1960 and this would make it the 11th time in the last decade -up $8 trillion since 2011- what does that tell you about our spending/gambling/fudged accounting by Governments in recent years…

With the US about to lose its authority to borrow more money under its current $14.3 trillion limit on August 2, this effectively means there won’t be the cash for it to pay all of its bills as per Treasury Secretary Timothy Geithner, so Treasury is currently working on a plan to decide who does get paid and who doesn’t- now that’s a really cheery thought! Basically the US Government will not be able to meet its existing obligations and pay its bills, whether they are for Treasury securities or Government Programs.

We’re getting closer and closer to the August 2 deadline with not much hope in sight with the Republicans and Democrats still not on the same page for the sake of the US short term or long term, not to mention the rest of the world. Most people have probably believed until now something would be worked out rather than send the economy into a further downward spiral and upset the global financial markets once again. Now, this seems a real possibility with the Federal Reserve preparing guidance for banks in the event the US debt limit isn’t raised and the Treasury Department runs out of money to pay all of its bills. Get your money out now people.

Even Blind Freddy can see that not raising the debt limit would have severe consequences. Of course, President Obama, Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke all realise this but all the proposals put forward for trying to address the country’s budget deficit are just not going anywhere because everyone seems to differ on just how to begin to reduce that deficit.

Should the debt ceiling NOT be raised the consequences are likely to be major as alluded to previously. The US credit rating would be harmed and investors would end up charging higher interest rates for buying Treasury securities which in turn would increase the country’s borrowing costs, making the national debt problem even worse in the long term. Not to mention how the rest of the world would react with the world’s richest and most powerful nation in the poo.

The Tea Party Republicans (with a name like that, need we say any more!) and in Congress since all of January 2011, are definitely flies in the ointment for the negotiations to be finalised sooner rather than later. With Democrats suggesting failure to reach an agreement will be the fault of the Republicans there’s no love lost between anyone.

Any agreement also unlikely until the last minute is what we keep hearing – well, Hello – it’s now 29th July – didn’t think Congress met over the weekend.. However, when an agreement is finally reached it will likely be temporary as has happened before, albeit the US economy and debt level hasn’t been as high. But, it will then lead to several short-term debt ceiling increases before a longer-term agreement is reached.

Not being able to pay it’s bills or meet its obligations is unprecedented in US history. Let’s hope the US doesn’t start this trend on August 2.

Oh and I bet you can’t wait for the issue being debated  during the upcoming 2012 Presidential election campaign – how the US is going to deal with its budget deficit! Riveting stuff.