What Does It Mean to Increase or Refuse to Increase the U.S. Debt Ceiling?

A few days ago, the U.S. Senate rejected a bill to raise the debt ceiling. In the event of a failure to reach an agreement on raising the public debt ceiling by tomorrow, the Treasury will be unable to meet its financial obligations.

The U.S. politicians’ gravitation toward each other is not without guile. The far right wing of the Republican Party wishes to overthrow President Barack Obama, whereas the Republican Party seems to be unwilling to assist the president in his ordeal. As for the American people, they seem to be desperate for the promisees Obama made during his election campaign in 2008 and has not been able to achieve.

Most U.S. newspapers published in recent days have addressed the debt crisis striking the United States, criticizing and analyzing it. A kind of consensus has been reached on the fact that the crisis has become severe and begun to enter a cycle of destruction. Also, it has begun to leave direct repercussions on the American people, with the continued low rate of GDP growth.

To raise the question again: What does it mean to raise the ceiling, and what does a lack of agreement to raise it mean?

Raising the ceiling means pumping colossal amounts of money, which could be called quantitative easing 3, into circulation. This could translate into a wave of inflation. The absence of an agreement means the danger of pushing the global economy into recession.

It is known that the U.S. budget has been suffering a significant deficit for over many years, issuing bonds to allocate funds from home and abroad; creditors proceed to buy those bonds, based on the international market’s confidence in the robustness and reliability of the U.S. economy.

It is estimated that the U.S. government spends as much as $200 billion per month more than it takes in. The debt is currently about $14.5 trillion. The latest estimates show that Apple, the computer industry and software giant, has more financial liquidity than the U.S. government.

A few years ago, the level of the U.S. government debt was relatively reasonable, not exceeding half of the total GDP. However, America’s military adventures and its increased spending in other areas, coupled with a tax cut, increased the public debt to critical record levels; by the beginning of 2008, in President George W. Bush’s term of office, the debt balance reached nearly $10 trillion and increased significantly during the global financial crisis.

Congress sets a ceiling for U.S. government borrowing. The debt now has reached the ceiling (about $14.5 trillion) that was decreed by Congress prior to these past few months.

Even thinking that the United States will not be able to discharge its debt will be difficult not only for America, but for the entire world: That is thanks to the weight of the U.S. economy and the position of the dollar. All this is well known to people. Most of the rich countries, such as China, some European countries and the Gulf States, are major investors in U.S. Treasury bonds.

If the U.S. debt ceiling problem persists without a short term solution (either tomorrow or beyond), the credit rating agencies will reduce the solvency of the U.S. government and the degree of its classification. This would likely lead to dramatic damage in the short and medium term on the U.S. and global economies.

The U.S. government will be forced to pay its expenses through the cash flow channel only. That is, they will not pay some dues, including insurance benefits and social security. It is very likely that some government offices will close, that large numbers of government employees will be laid off and that America will refrain from paying some or all the debt to be paid on time. The government will determine the priorities for payment and will significantly raise interest rates.

As for the story of setting priorities, it is an extremely difficult issue. There will, no doubt, be victims of the so-called policy of priorities. This will so seriously hurt the dollar’s reputation that it will be difficult or impossible to repair it. Countries will begin to get rid of the dollar with no return. Consequently, there will be a tough response from the global financial markets: a partial scarcity of lending and loss of millions of jobs around the world. Is all that really expected to happen?

It is very unlikely, God willing, to occur. These are just positions and maneuvers. They will not continue and will be addressed.