The Side Effects Of Raising The Debt Ceiling

on Monday, 10 January 2011. Posted in Economy, Business

debtThe national debt in the USA now is around $13.9 trillion which is $400 billion short of the debt ceiling. The debt limit was taken to $14.3 trillion at the start of 2010. Alarmingly, it seems the federal debt will cross the debt ceiling in this spring. That has led Treasury Secretary Geithner to issue the following warning in a letter to President Obama:

Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.

On the other hand, raising the debt ceiling is not a magic bullet for financial security. There has been, in fact, quite a debate on whether or not the debt ceiling must be raised. The Obama administration has been joined by some Republicans in calling for an increase in the debt ceiling. Republican Senator Lindsey Graham (S.C.), echoing Geithner, warned on CNN: “Let me tell you what’s involved if we don’t lift the debt ceiling: financial collapse and calamity throughout the world.”

Others disagree. In an open letter to Senate Majority Leader Harry Reid, Addison Wiggin, author of the books Financial Day of Reckoning and Empire of Debt, and the writer and producer of the documentary I.O.U.S.A., wrote: “by raising the debt ceiling, we’re delaying the day of reckoning yet again. Instead of paying for our excessive spending today, we’ll pass that burden on to our children and grandchildren. I have three young children. And I, like many Americans, already find it a challenge to educate them and provide for their health care. Now I must also worry about what their future is going to look like…what opportunities will they find when it’s their turn to join the work force or start businesses?”

Failure to raise the debt limit would mean, according to Bruce Bartlett, an official in both the Reagan and George H.W. Bush administrations, that the Treasury Department would not be able to issue any more bonds. As a result, he notes for Salon, what “would then happen is that the Treasury would lack the cash flow to be able to pay its bills. Every single day the Treasury has bills to pay, Social Security benefits, interest on the national debt ... But if the debt ceiling is not raised, the only cash it would have to pay those bills would come from the tax revenues that come in on a day-to-day basis -- from the payroll tax or from income tax withholding. But that would not be enough to pay the bills that are due that day, so somebody at the Treasury is going to have to decide -- as individuals do when their pay doesn't cover their credit cards and other debts -- who gets paid this month and who doesn't.”

In other words, the Treasury may default in their obligations and spending may be slashed not only in Social Security but also in defense. Thus the investors who thought that the Treasury was a safe haven may also suffer and the global investment market may go down and the government may shut down.

Ultimately, the United States may face a crisis similar to that afflicting Greece. There, as CNN notes, the national debt “is bigger than the country’s economy, with some estimates predicting it will reach 120 percent of gross domestic product....” For comparison purposes, current U.S. GDP is $14.7 trillion versus debt of $13.9 trillion.

Raising the debt ceiling is one way to prevent default in the short term, but ultimately federal spending needs to be reduced. As anyone suffering with credit card debt knows, paying debt by acquiring yet more debt ultimately results in an untenable financial situation. If federal spending is not brought under control, even the dollar, the world’s reserve currency, may lose its place.

Powell is a contributory writer associated with the Debt Consolidation Care Community and has written several articles for various financial websites. He holds his expertise in the Debt industry and has made significant contribution through his various articles.

Copyright © 2011 Powell. Used with Permission.

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