Debt Ceiling

Institutional Affiliation
Debt Ceiling
A debt ceiling is the maximum amount of money that the US government,
through treasury can borrow from other governments and external agents.
When Congress approves budget and the federal government cannot collect
enough revenue through taxes to for all budgetary allocation it is
allowed to borrow from outside agents but up to a certain limit, this is
what is called debt ceiling (Plumer, 2013).
Treasury is supposed to have enough financial resources to cater for all
government’s financial obligation and by October 17 it is projected
that the government will have exhausted all its extraordinary measures
that have been put to temporarily avert a looming financial crisis. This
means that Congress has to increase the debt ceiling or the US
government will not be able to pay its bills which currently stand at $
10 billion. If the debt ceiling will not be raised by October 17 the US
government will owe 458 billion in payments related to military,
Medicare and social security and 46 billion interests of loans and $12
billion. By the end of that month the government will be short of its
financial obligation by $58 billion which will be hard to raise if the
current debt ceiling of $16.99 trillion is not increased.
This will call for drastic measures to avoid a financial crisis the
options are limited and can only serve as order of last resort. For one,
the US government could prioritize on its expenditure so that payment to
bondholders is made before other bills to avoid a crisis in credit
market. This is practically possible since the computer system that
takes care of debt repayment, Fedwire is distinct from other system, but
it would come with huge negative economic repercussions. It would mean
that the US government is in a weak position to pay interest on
bondholders and thereby if it becomes necessary to sell more bond in
future very few individuals would buy (Plumer, 2013). On the other hand,
failure to pay interest on debts would crash the credit market and the
value of the dollar would hit a solid low. Domestic interest rates would
rise, high enough to spill over to other markets and consequently
causing a financial crisis and recession.
The option of minting platinum coins is disastrous, it would lead to
massive inflation and push interest rate high. The cost of borrowing
would increase and this would turn away any domestic and foreign
investors especially in the financial sector. Fewer jobs would be
created, unemployment will rise and the country would be caught up in an
economic dilemma. A default would therefore be unthinkable and the only
way out is for congress increase the debt ceiling.
Reference
Plumer, B. (2013). Absolutely everything you need to know about the debt
ceiling. Wonkblog . Accessed on 12 October 2013 from HYPERLINK
“http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/04/absolutely-e
verything-you-need-to-know-about-the-debt-ceiling/”
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/04/absolutely-ev
erything-you-need-to-know-about-the-debt-ceiling/
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