What is the debt ceiling?<br /> In the United States, the federal government can only pay for expenditures if Congress has approved the expenditure. If the total expenditure exceeds the revenues collected there is a budget deficit, and the only way that the shortfall can be paid for is for the government to borrow the shortfall amount by the issue of debt instruments. Under the federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a vote by Congress.<br />
What is the issue all about?<br />The debt ceiling limit was set at $14.3 trillion in Feb. 2011. However soon after budget was passed in 2011, this ceiling was reached.<br />Once the limit is reached government can continue to borrow by "extraordinary measures”. These measures were implemented on May 16, 2011 and a debt issuance suspension periodwas declared.<br /> This period could last until August 2, 2011, and the borrowing authority of the United States was exhausted.<br />
The main concern behind the issue is about the large United States federal budget deficits and the increasing federal debt.<br />At the end of 2008, that debt equaled 40 percent of the nation's annual economic output. Since then, the figure has shot upward: By the end of fiscal year 2011, the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP) — the highest percentage since shortly after World War II!!!<br />
What caused the debt to rise unstoppably?!<br /><ul><li>First, America’s economy is at near-recession levels, with slow growth prospects and enormous unemployment. With more than 14 million Americans without jobs, it is not surprising that the U.S. economy is hardly growing.
Second, America has been fighting two wars in distant places for an incredibly long time — Afghanistan since October 2001 and Iraq since March 2003. The cost of these wars has many estimates is more than a trillion dollars that the economy can no more afford.
Third, The inability of either government or private industry to gain control of health care costs that includes health insurance programs, Medicare and Medicaidmay well be the single most critical factor in the burgeoning national debt.
Fourthly, the ever increasing expenditure and no increase in tax revenues is another major concern.
Finally , the United States has failed for too long to invest in the country’s infrastructure — both physical and intellectual. As a result, America is losing much of its future competitiveness in the global economy.</li></li></ul><li>U.S. feels the impact<br /><ul><li>If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government.If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. </li></li></ul><li><ul><li> On august 3 U.S. debt rose to $238 billion (or about 60% of the new debt ceiling). The US debt surpassed 100 percent of gross domestic product for the first time since World War II. </li></li></ul><li><ul><li>The NASDAQ, ASX, and S&P 100 lost up to four percent in value, the largest drop since July 2009.
The commodities market also took losses, with average spot crude oil prices falling below $US86 a barrel.
The price of gold fell, as deepening losses on Wall Street prompted investors to sell.</li></li></ul><li><ul><li> Standard & Poor’s credit rating</li></ul>Throughout 2011, Standard & Poor's and Moody's credit rating services issued warnings that US debt could be downgraded because of the continued large deficits and increasing debt. On August 5, 2011, Standard & Poor's credit ratingagency downgraded the long-term credit rating of the United States government for the first time in its history, from AAA to AA. “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” The other two major credit rating agencies, Moody's and Fitch, continued to rate the federal government's bonds as AAA.<br />
<ul><li> According to the CBO's 2011 long-term budget outlook, without major policy changes the large budget deficits and growing debt would continue, which "would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States." </li></li></ul><li>FACTS…<br />
General Electric CEOJeffrey Immelt at the jobs for America Summit in Washington on July 11. GE made $14.2 billion and paid no taxes in 2010.<br /> It is a sign of how poor things are that president BarackObama chose him to chair his council on Jobs and Competitiveness. <br />GE remains competitive not by creating jobs but by tax shelters and producing in areas where wage rates are lower. <br />
The U.S. government had an operating cash balance of $73.8 billion at the end of the day.<br />Apple's last earnings report showed that the company had $76.2 billion at the end of June.<br />In other words, the world's largest tech company has more cash than the world's largest sovereign government.<br />That's because Apple collects more money than it spends, while the U.S. government does not.<br />
Conclusion<br />The best cure to America’s debt and deficit problems is a strengthening economy with more jobs, more consumption of goods and services, and more tax revenue for the U.S. Treasury. There is a need to improve growth, reduce unemployment and revive the real economy. Choosing to cut expenditure sharply at this point in time could deliver the second of the downturns expected by economists who feared a double-dip. <br />