Hitting The Ceiling

US government will be seen hitting limit.

In the next coming months the United States federal government is expected to hit the debt ceiling, a limit on how much the federal government is allowed to borrow. But until then a battle in is brewing in Washington, in a new and politically divided congress, between the white house and republicans on whether or not to raise the debt ceiling. Having already been raised in February of 2010 to 14.3 trillion and raised another four times in the previous three years, bringing the total amount of times the debt ceiling having to be raised to 5 times from 2007 to 2011. But because the US is persistently running ever increasing budget deficits the debt limit is reached more quickly, due mostly to bush era tax cuts for the wealthy which were extended by president Obama and the unfailing stubbornness of the current administration to reign in government spending.

The white house economist said: “not raising the debt ceiling would be catastrophic, leading to a worse economic crisis than anything we saw in 2008”

In 2009 Tim Geithner, current secretary of the treasury, formally requested that congress raise the debt limit.

“Its critically important that congress act before the limit is reached s that citizens and investors here and around the world remain confident that the U.S will meet its obligations”

Tim Geithner argues that by raising the debt limit the U.S will be sending a signal to investors and creditors of the U.S that they can be confident in America’s ability to meet its loan obligations and not to worry.  Where in fact by raising the debt ceiling may do the exact opposite. The fact that congress along with the treasury department always raises the debt limit shows that the federal government will never meet its loan obligations, that the U.S will simply go deeper into debt, meeting loan obligations for the American government means paying those loans back.

If congress refused to raise the debt ceiling, that would signal to investors and creditors of the united states of America that it  is indeed committed to meeting its loan obligations, because only then would the federal government need to pay back the money it owes, congress would have to either raise taxes to generate sufficient revenue or much preferably cut government spending.

But if congress keeps going deeper into debt, the US will never meet its obligations only delaying them to a later date making default on those loans inevitable and much more severe for the US and global economy when that day does come.

So what is really at stake when facing the debt-limit?

What is the debt ceiling?

In 1917 congress passed laws to establish a limit on how much debt the federal government can carry. If the country’s accrued debt exceeded this limit, the US essentially defaults on its loan obligations.

Exceeding the debt ceiling

If the debt limit of the federal government is reached, the US would essentially default on its debt, this would be catastrophic, a kind of domino effect would ensue weakening the dollar and badly damaging America’s creditor’s portfolio. America would lose its treasured AAA credit rating which in turn would raise borrowing costs as investing in American treasury bond would be more risky demanding higher interest to be paid to investors this significantly adds to already grave budget problems and the growing budget deficit, putting the once great USA in the company of other debt wracked countries such as: Ireland, Iceland, Greece and Argentina.

When will the debt ceiling be reached?

When the debt ceiling will be reached is determined by tax collections & sales of assets acquired in tax-payer financed bailout among many other factors. But this January is looking strong as corporations are announcing stronger-than-expected profit growth which will widen tax revenue in the form of corporate tax, but all factors considered looking at recent federal seasonal spending and revenue trends, its estimated that the $14.3 trillion debt limit will be reached toward the end of march/early April so expect the US congress to convene on the matter of the debt limit in next month or two.

What will congress do?

Since the world war two congress has raised the debt ceiling 73 times. The white house and congress alike has treated the matter as a routine part of keeping the US government functioning, they have grown accustom to delaying and compounding the inevitable instead of addressing the problems of today choosing to ‘kick’ the proverbial can ‘down the road’ and letting future administrations and generations deal with it. So congress will almost certainly raise the ceiling again sometime next month to avoid facing default on its obligations. But to win republican support of the move  the white house will likely have to agree to enact some cuts to social programs which may be enough to wipe out any stimulative effects  from the recent Obama-republican tax cut deal.

The long term consequences could be catastrophic for the American government as they will simply go deeper into debt unless sensible tax programs and spending cuts are devised until then the hole America is digging for itself is only getting deeper and deeper, could this be the beginning of the end for once great republic?

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