Debt Ceiling News: Why is Congress increasing the Debt Ceiling?

How was the US able to accumulate huge levels of debt?

Just as high school students are rewarded with grades to judge their academic performance, companies are allotted credit rating by agencies such as moodys to judge their credit health. This credit rating is dependent upon a country’s debt to GDP ratio. The debt to ratio indicates how likely any company is able to repay its debt. For example, Microsoft and other well-known brands boast the highest rating available called the AAA. Their good ratings correspond to their track record of timely debt payments. However, new companies like Tesla are likely to get lower grades, like BB. These ratings affect their interest rates as well. For example, while Microsoft can procure a loan at an annual interest rate of 2.5%, Tesla must pay a 5.3% interest rate due to the higher risk associated with lending to Tesla.

The US was able to accumulate this vast debt due to virtue of it being a military and economic superpower. Investors had deep confidence in the ability of the US to pay back its debt and continued to fund the US debt. The US has historically held a rating of AAA. However, this rating often downgrades to negative when the US reaches its debt ceiling. To avoid the downgrading of ratings and other repercussions, authorities often raise the debt ceiling. This enables the government to continue borrowing from the financial markets at a relatively cheaper rate.

Current Debt Status

As of early September 2023, the US countrywide debt stands at nearly $33 trillion. Despite a slight decrease of approximately $300 billion from the give up of July 2023, about $7 trillion of the debt contains intragovernmental debt holdings. It’s essential to recognize that the countrywide debt typically serves as an accounting record, reflecting the stability between dollars delivered to the economy and those subtracted via taxation. In addition to the government debt is the skyrocketing Public debt which includes Mortgage, Credit Card Debt and Student Loans. The total amount of student loans is $1.6 trillion dollars, but mortgages surpass even that, amounting to $12 trillion. To immediately pay off both the government and public debt, each US citizen would need to work for 1.5 years without pay, according to estimates.

To whom does the US owe money?

In the US, the majority of public debt is in the form of government bonds. These bonds are denominated as Treasury bills, bonds, and bills etc. These instruments provide the government with a loan that promises future repayment or interest payments. The Treasury meets this debt ceiling by issuing bonds, which serve as a means of paying for government programs. The dollar’s status as the global reserve currency reinforces the attraction of US Treasury debt and its position as a safe asset.

Notably, American individuals, companies, and various entities hold over a third of US debt domestically. Foreign investors, particularly Japan and China, also play a role in U.S. debt ownership. Japan and China hold just a fraction of the US’s debt in comparison to other stake holders.

Impact on Economic Stability

A critical metric in assessing the impact of debt is the debt-to-GDP ratio, which indicates the government’s ability to service its debt ceiling. With the US nearing a 100% debt-to-GDP ratio, concerns arise regarding the sustainability of servicing the debt, particularly as interest rates rise. The only time that the US reached such critical levels of debt was in the aftermath of the 2nd World War. However, the nation was able to bring that percentage down due to the massive consumtion surge after the war. Today, there is little chance of a sudden economic boom taking place. However some people remain optimistic and have tied their hopes with the AI revolution. This hope that AI may lead to another industrial revolution needed to deindustrialize the US.

Debt Management Strategies

Historically, governments have used public debt to navigate emergencies and financial shocks, smoothing out disruptions to the financial system. However, concerns arise when borrowing extends beyond emergencies and critical investments into immediate consumption. This inevitably compromises lengthy-time period fiscal fitness. There are a number of manner through which the United States can correct it’s financial discourse.

The easiest but the most daunting of all would be the US defaulting on its debt. Defaulting would not only jeopardize the U.S. financial system but could also lead to adverse consequences such as rising interest rates, diminished economic growth, and loss of investor confidence. The US will overnight loose its status as the world’s pre-eminent superpower. The world may be pushed into a global economic crisis reminiscent of the 1928 Wall Street crash.

The 2nd option is for the US treasury to print its way out of the debt crisis. Most of the US debt is denominated in dollars and the US can print dollars to repay its debt. However, doing so can also land the US economy in hyperinflation.` This can again lead to an economic crisis that is equal if not more in magnitude to the one described above.

The third option is the US Government adjusting it’s spending according to its revenues. This involves the US reforming its fiscal and trade policies along with introducing new tax regulations along macro-economic strategic that boost the US economy and allow the government to repay its debt.

Conclusion

The US’s ballooning costs for defense and social spending are the main reasons why the borrowing spree is still on. Thus a gap emerges between the taxes collected and US government’s bills. Thus, while the US might solve its deficit by borrowing in the short term, such practices are unsustainable in the long term.