The House and the Senate voted 81 to 18 Late Wednesday night to reopen the federal government until Jan 15th, 2014 and increase the nation's borrowing limit until February 7th, 2014 close to the deadline of when the Treasury Department faced the possibility of being unable to pay all of America's bills for the first time in recent history. Under normal circumstances, the government is able to auction off new debt in order to finance annual deficits. The debt limit places an absolute cap on borrowing, requiring congressional approval for any increase or decrease) from this statutory level. The U.S. Treasury has borrowed trillions of dollars over the past decade, a lot of it from foreign investors, to help finance two long wars, resuscitate its financial system, and encourage economic growth via fiscal stimulus. The country's ability to borrow is restricted by law, and Congress has usually been called upon to authorize the issuance of new debt space. The U.S. Treasury has the authority to take extraordinary measures to forestall a default which is the point at which the government fails to meet principal or interest payments on the national debt. The U.S. Treasury can under-invest in certain government funds, suspend the sales of non marketable debt, and trim or delay auctions of securities.
Prior to 1917, the United States had no Debt Ceiling. A debt limit was passed with the Second Liberty Bond Act of 1917, and Congress has raised the cap more than seventy times since 1962. People argue that by requiring legislative consent, the debt limit affords Congress some oversight authority and creates some fiscal accountability.
Most recently the federal government hit its debt limit once more in December 2012, the Treasury was forced to take emergency measures to extend borrowing for several weeks. In February, President Obama signed the No Budget, No Pay Act of 2013, a bill that suspended implementation of the debt ceiling till May. On May 19, the federal borrowing limit came back into full force and was raised $305 billion to $16.699 trillion.
The United States failed to pass an annual spending measure by October 1, 2013, the start of the fiscal year, resulting in a partial shutdown of federal services that analysts say could eventually drag on economic growth, and even cause a recession. Neither keeping the debt ceiling where it is or raising it is good for the US. Increasing our debt to gdp ratio is bad. However, the effects of that will be inconsequential compared to a not raising the debt ceiling.
If we didn’t the raise it the nation would continue to be at risk of default. If this issue remained unresolved longer and resulted in a default it would definitely come with its share of negative consequences. Had this ordeal resulted in the us government no longer able to meet its financial obligations we would have been subject to government services being slashed, high interest rates and market unrest. The effects of a default would also be international, as economies such as Japan, and China which own substantial portions of our debt will have severe issues in their financial markets.
One of the consequences of defaulting would result is cuts in government services. This would be because over the next year we are estimated to spend roughly around 30 billion more every month than taken in. So if the debt ceiling were not raised the government would eventually have start cutting government services in order to comply with our financial obligations. According to the Congressional Research Service they estimated that if the debt ceiling was raised for a year government would have to either slash discretionary spending by 33%, Hike taxes by 12%, cut mandatory spending by 16% a month, or a combination of the three.
Also thing is the postponement of the raising of the debt ceiling would increase market preoccupation of the possibility of a US default. Thus, causing a sell off of US treasury bonds. Which would in turn raise the interest rates, meaning increased borrowing costs and mortgage rates. In the end it was crucial that we extended the debt ceiling. We are still not out of the woods yet on February 7th the debate of raising the debt ceiling will be on the table again.
By:
Luis Alberto Sanchez Cordero
&
Benjamin Frye
Sources
http://finance.yahoo.com/blogs/hot-stock-minute/september-hiring-misses-estimates-unemployment-rate-falls-130358302.html
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