The Debt Ceiling is the maximum amount of money that the United States government has agreed it can owe. We are about $14.3 trillion in debt and our current budget operates at a $1.5 trillion deficit (meaning we will owe almost $16 trillion in another year). The U.S. reached the Debt Ceiling last month.
What Happens Now?
If the debt ceiling is not increased, then the government does not have the funds it needs to continue operating. Instead of closing up shop, the government will most likely have to default on certain payments. Whoever is on the short end of that stick will be pissed. Never mess with another man's money. This possible scenario will also cause credit rating companies like Moody's to downgrade U.S. government bonds (investment instruments) from AAA (highest investment rating, means what you are buying is very secure and stable) to negative. Negative ratings scare investors. AAA ratings excite investors. Scared investors means less money flowing into the economy, and that's not good for anyone. Now, the politicians have to decide whether they want to raise the Debt Ceiling or not.
What's the Argument About?
Both parties want to raise the Debt Ceiling to avoid the worst possible scenario. They disagree about how to do it. Republicans want huge cuts to social programs. Democrats want to raise taxes. They should do some of both, but the political heat is on really high. 2012 is a huge election year and what politicians do with this issue will have massive implications for their upcoming races. So, the Republicans can't be seen agreeing to ANY tax raises and the Democrats can't be seen agreeing to cut ANY social programs, even though it's the right thing to do. That's just all kinds of stupid.
Why Does a Credit Rating Agency Have So Much Power?
I don't know. People depend on them when looking at investments and they are regulated by governments to ensure a certain amount of objectivity. Notice, however, that after the recent financial crisis they were defending themselves before Congress by saying over and over again that Credit Rating Agencies "are only offering opinions" and that this fell under the protection of the Freedom of Speech clause. They gave AAA ratings to sub-prime backed derivatives, which were crap. Why do we still listen to them? It seems that the only thing they have been good for recently is putting people into debt. Why someone in the U.S. government has not called them out on this inconsistency in light of their threats to lower our credit rating is beyond me.
What a mess.
I love reading your blog, your posts are always exactly what I am thinking. Seems like to me that the US is in for a world of pain over the next 30 years if we don't reign in our spending. We might become like Greece or the other European countries.
ReplyDeleteI just looked it up - seems like the US GDP for 2010 was about $15 trillion. Our national debt seems to be $14.3 trillion like you say above. That is a debt/GDP ratio of 95%. Let's say our economy grows at 3% next year, and the debt grows by $1.5 billion again. Then it would be $15.45 trillion GDP and $15.8 debt, a ratio of 103%. This is just not sustainable, and will eventually lead the US into not being an economic superpower anymore.
Thanks for the encouragement Nelly, it always helps, especially from a guy who deals with numbers for a living! I don't think the U.S. will decline so far as to not be "an" economic superpower, but we might decline to a point where we're no longer "the" economic superpower. You're absolutely right about the debt/GDP ratio and 3% is a moderate/high estimate too. All signs are showing a tree-sloth-speed recover. Surely we could find ways to save another $40 billion or so at the very least.
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