Raising Debt Ceiling of the United States

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Raising Debt Ceiling of the United States

Introduction

Over the last decades, the United States borrowed trillions of dollars, much of which came from the foreign investors. The money was used to fund the two long wars, liberate their fiscal structure and support economic development. As long as the government keeps running their budget deficit, they should be in a position of issuing new debts. The US current deficit per month is approximated $125 billion. Their national debt is more than 14.3 trillion and it is increasing everyday; thus it is about to be affirmed bankrupt. There are rumors about raising the debt ceiling and the concern amounts on the implications on the value of the dollar in case the debt ceiling would be raised. Thus, raising the debt ceiling would cause demand to shrink pushing down the value of the dollar in relation to the foreign currencies and interest rates would increase causing persistent volatility of the dollar.

Implications of raising the debt ceiling

The government non-payments would be severe in the financial market in case the debt ceiling would be raised. The chairperson for Federal Reserve labeled a US default that would be likely to spark off another economic crisis. Consequently, the US officials warned the legislative about the significant harm in the US economy that would arise due to raising the debt ceiling. Some economists argued that there would be a considerable uncertainty in the union markets, which would place increasing demands on the interest rates. In addition, the increasing pressure would affect the federal government’s future borrowing costs and even the capital costs for the struggling Americans business and homebuyers would be high (Masters, 2011).

Nevertheless, raising the debt ceiling would increase the interest rates. This would in turn divert the taxpayer’s money away from the much needed capital reserves such as infrastructure, education and healthcare in the future. The economists estimated that even an increase in the treasury yields would expense the taxpayers a lot of money every month (Schatz, 2006). The economic analysts warned the government not to play with the national debt because it would reach a time when it would accelerate from the actual default. Thus, it was recommended that taking drastic precautionary measures is vital because it would enable the states to plan for future.

There would be negative rating implications for multilateral development banks and this would affect many nations including the United States. This is because they are the key shareholders of many international banks. These banks include the International Development Bank, International Monetary Banks and the International Banks for Reconstruction (Masters, 2011). Other analyst advocates for the overrated market upheaval arguing that the government would be forced to borrow additional money in every month to finance all of their obligations. In case the US treasury would decide to pay their creditors and reduce the government spending, the cuts would affect the congressional salary and the expenses of the white house.

The effect on the value of the dollar if the ceiling is raised

Raising the debt ceiling would cause demand to shrink pushing down the value of the dollar in relation to the foreign currencies. Some exporters from the United States would benefit due to depreciation of the currencies. This is because there would be an increase in foreign demands for their products and the same time industries would bear higher costs of borrowing due to the increasing interest rates. In addition, the dollar would become persistently volatile because of debt ceiling. This would force the international community to reserve the dollar currency because it is dominant and commonly used in the exchange rates. They would do this in order to overcome cases of depreciation and inflation impacts that may arise due to the persistent volatility of the dollar.

In addition, debt ceiling would increase the interest rates and this means there would be an increase in the spending power or demand for more goods and services. This would in turn force the government to borrow more and the system would contribute to inflation because there would be a lot of money in circulation within the states. Moreover, an increase in interest rates would lead to more demands and the vicious circle would later be broken down making the US to be declared bankrupt. In case the government would refuse to raise the debt ceiling, they would restrain in borrowing, making the interest rates to increase due to the default. This would lead to increased debts (Money & Business, 2002).

Raising the debt ceiling would lead to increased interest rates, which would in turn lead to high demand thus causing inflation. The US treasury market has been driven by increased investments and increased debt ceiling. The research study indicates that the US market has reacted towards debt ceiling debate. The US rated its credit from its long held causing dollars in the international market to run parallel to a robust of the economy as indicated in Figure 1 below. The US treasury borrows from the foreign investors and this has led to the high percentage of debts and downgrading its outlook from a stable to a negative in the market economy (Business week, 2011).

Ways in which the United States can eventually get out of debt

            There are diverse ways in which the United States can get out of debt. First, they would open borders for willing workers from all over the continents to participate in international trade. This would accelerate the business and increase the tax necessary for reducing the debt. However, there has been highly a controversial debate on boarder control that has been raged on and off for many years. Moreover, in case the state would open borders, many countries would find a way of importing commodities from the US. Therefore, the US would raise their taxation across the borders making the country able to clear away debts.

Another way is raising the retirement age perhaps to seventies than sixties and restoring the tax pay. This could help to fix the national debt through increasing the amount of period for tax payment. In addition, they can also cut down their reliance on social security because this would help them to reduce debts (Liu, Shao and Yeager, 2009). The government would allow people to work for a long period but draw on their social security for a less time. In addition, restoring the tax pay can be done through reducing the income tax rates. This can be done through abolishing the popular tax breaks for individuals and organizations. They can advocate on higher payroll tax on high-level income earners as well as reducing expenditure in defense and other types of administration spending.

Easing off business regulations and taking cues from abroad are another ways of getting out of debt. The United States need to regulate business damages in the economy through increasing costs and inefficiency. Politicians and economists advocates lessening the business regulations to help shrink the national debt. Nevertheless, taking cues from abroad such as higher taxes on income because this discourages savings. The system of paying taxes in US need to be restructured through a adopting other methods from other countries that are suitable in enabling them do a way with the national debt (Rifkin, 2008).

Conclusion

Raising the debt ceiling would cause demand to shrink pushing down the value of the dollar in relation to the foreign currencies and interest rates would increase causing persistent volatility of the dollar. The government non-payments would be severe in the financial market in case the debt ceiling would be raised. Moreover, raising the debt ceiling would increase the interest rates, which would in turn contribute to inflation in the economy. In addition, it would increase the interest rates and this means there would be an increase in the spending power or demand for goods. It would cause demand to shrink pushing down the value of the dollar in relation to the foreign currencies. The US can eventually get out of debt through opening boarders. They can also raise the retirement age perhaps to seventies than sixties and restoring the tax pay. Lastly, they can ease off business regulations and take cues from abroad.

 

Figure 1: Graph of U.S. Debt Ceiling by Masters (2011)

 

References

Business week (April 18, 2011). If Congress fails to raise the debt ceiling, the U.S. begins

defaulting-and all hell breaks loose. But that won’t stop the brinkmanship. Business Week New York-, 4225, 6-8.

Liu, P., Shao, Y., & Yeager, T. J. (August 01, 2009). Did the repeated debt ceiling controversies

embed default risk in US Treasury securities?. Journal of Banking & Finance, 33, 8, 1464.

Masters, J (2011). U.S. Debt Ceiling: Costs and Consequences. Retrieved from

http://www.cfr.org/international-finance/us-debt-ceiling-costs-consequences/p24751

Money & Business (January 01, 2002). While Congress fiddles – Politics delays action on debt

ceiling. U.S. News & World Report, 132, 22, 33.

Rifkin, M. (March 17, 2008). Debt and the Transnationalization of Hawaii. American Quarterly,

 60, 1, 43-66.

Schatz, J. J. (March 20, 2006). Raising the Ceiling Again The Senate narrowly cleared a $781

billion increase in the federal debt limit, averting a government default. Congressional Quarterly Weekly, 64, 12, 766.