It’s that time again. The time when all the financial markets get themselves worked up about the US Debt Ceiling for the US National Debt.
On 3 November 2015, the limit on the US Debt Ceiling will be reviewed. It’s hard for many to understand what all the fuss is about and how it’s even relevant to the rest of the world, so here’s a quick guide to the US Debt Ceiling Limit and why it is important to you and I.
The US Debt Ceiling Limit is an arrangement of convenience that allows the US Government to borrow up to an agreed limit (the ceiling) to fund its spending. The ceiling limit was introduced way back in the deep dark past and was a mechanism to allow the Government of the day to get around the need to get every spending bill passed by congress. It all seems pretty simple enough.
Where the trouble lies, however, is that congress is currently controlled by the republican party and the President is a democrat. So, much, like the Australian Government has to negotiate difficult legislation through the senate, President Obama has to negotiate with congress to get legislation passed.
Like any government, the US Government needs money to run its services. The US Government has chosen for many years to borrow money against future earnings (tax).
One of the key points of political difference between the republicans and democrats is not necessarily how much money should be spent but where it should be spent and that creates tension when US Government spending gets close to the ceiling level.
The argument used by both political parties, when it has suited them, is that the debt ceiling helps keep a tight rein on US Government spending, keeping a rein of fiscal responsibility on the President.
On the past few occasions both sides have played hardball, with the republicans threatening to block any attempts to raise the ceiling unless policies were changed. This has resulted in very real speculation that the US Government could run out of money to spend.
This would be disastrous for the American economy and many Americans. Welfare payments would not be made, government salaries could not be paid and America could default on its debt obligations.
If this were to happen, then the flow on effects for the world economy and Australia would be enormous.
Its current debt is in excess of $18 trillion – that’s an awful lot of zeros. A huge concern considering America’s GDP (Gross Domestic Product) in 2014 was around $17 trillion. This massive debt is unsustainable long-term. They know raising the debt ceiling is only a temporary fix to major problem.
Thankfully, so far, cool heads have prevailed and the debt ceiling has been raised after some posturing from both sides.
The US is really stuck between a rock and a hard place … let’s see how the debate goes this time.