A simple way to explain the current US Debt Ceiling crisis.
Debt Ceiling - Debt Ceiling is about money that is already being spent.
Let us look at the following analogy.
You go to Wal-Mart and buy an expensive household item. You pay for the item in EMIs. Later on, you think that you have spent a lot of money and you just want to stop paying for it. But, you forget that you have bought it and have used it. You have to pay for it.
Debt Ceiling is similar to the credit limit on your credit card. Your credit card is unusable once it reaches the limit and unless you pay what you owe. But, debt ceiling is like one big loan. US is one of those few countries in the world, which by law needs to keep on increasing its credit limit. US just keep borrowing more and more. The debt ceiling is the absolute top amount of money that the US can owe to anyone at any given time. The current debt ceiling amount is about $14.3 trillion. In order to keep things going on, the Congress needs to increase the debt ceiling amount. The current debt ceiling will reach its limit on 2nd August 2011, after which the US Government will not have money to pay for services like Social Security Administration, Health Services, Military etc.
The US has increased its debt ceiling limit before many times. But this time, it cannot be done for obvious reasons.
How does US borrow money?
US borrow money by issuing bonds. Bonds are a promise to repay money at a particular interest rate over a given period of time. The US is thought to be a safe investment bet. There are countries which issue bonds but one is not sure what the future of that country looks like. Also, the US have got the highest credit rating (AAA), which means that it repays all the money which it can borrow. It has always paid its debt on time. Hence, the US is looked upon as a safe bet.
What happens if debt limit is not increased?
The US hit the debt limit on May 16th but the Treasury Secretary was able to provide some quantum by moving money around, keeping the US solvent until August 2nd 2011. If the debt ceiling limit is not raised by August 3rd 2011, somebody is not going to get paid. Some people think this may lead to a financial crisis. But, nobody knows what will happen because this has never happened before. Nobody is sure what is going to happen.
Clash of opinions.
Republicans are of the opinion of increasing the debt ceiling limit as Mr President wants it to be. But, they want guaranteed spending cuts immediately. They want to regulate the US budget so that US is not driven all the time to such massive levels of debt. Democrats are of the opinion that this is not the right time to start cutting Government spending in such a fragile, recovering economy. Businesses have not recovered from the effects of recession. If the Government reduces its spending, then the economy is at a severe risk of another economic downturn.
Ultimately, what is going to happen will only be known after 2nd August 2011 if the debt ceiling is not increased by then.
PS: I have just tried to explain the current US Debt Ceiling Crisis based on my understanding.
PS: I have just tried to explain the current US Debt Ceiling Crisis based on my understanding.
nice article..
ReplyDeleteIf the US does not raise Debt Ceiling....
ReplyDeleteNo working capital--> Less public expenditure --> More tax collection --> High Cost of goods sold --> High Inflation --> High Unemployment --> More protectionism --> More trouble for Indian Companies --> US will make sure that its citizen get maximum employment --> which will create further High Costs of Production --> High Interest rates --> Unsustainable economy at least for some years with extremely low growth and staganant scenario
If US does raise it ..
Spending Cuts --> More restrictions on businesses --> Less stimulus --> less money available --> Less consumer driven business --> Recession prolonged --> More time for recovery....
Either way its killing ....What they have to choose is which is less painful way....
@Neeraj: kahihi aso! Mala job pahije fakt. :P
ReplyDeleteNice article... quite informative...:)
ReplyDeleteMayur - Very well explained!
ReplyDeleteHarshal Mate - Savings rate in the US is very low. There are two reasons for this, per my understanding - 1. consumerism & 2. it's developed, industrialised nation. The US has sustained its economy basically on borrowed money and imports for a long time. It is the reason that they have huge trade deficits. They need to realign their trade deficits and financial account surpluses. Generally countries do this by keeping foreign currency reserves (especially US$). But since the Dollar it's US' own currency, they will have to find another way to balance their deficits. So far the easiest way has been to borrow more!
BTW, Mayur, ata kharokharach tu US madhe shikayla gelays asa wattay! "The psychological result of perception and learning and reasoning." -- he aaplyakade kadhich hou shakat nahi! ;-)
ReplyDelete@Madhura - "The psychological result of perception and learning and reasoning." It took me 1 year to reach to this level. :P ( it is the wordweb meaning of noesis)
ReplyDeletebtw, all those things are so complicated. I was following the debt ceiling news but understood it only after a week after I started following it.
@Harshal Mate: prashna je kahi astil te mala nako vicharu. jara swataha shodh lav. :P