Do you still think the United States of America cannot fail? In the past the US have declared default at least 6 times. Last default was in 1971 (For more infos click here). Being one of the largest world economy don’t guarantee against defaults. Due to globalization, the default of one of the top world economy would provoke a global crisis or better a global economic collapse. Of sure the US debt default would impact not only on China, the major US bond holder, but on the whole world economy.
Recent news suggest a new US default is possible.
Let’s start with some definitions. What’s the debt ceiling? It’s a mechanism adopted in the US in order to limit the national debt the Treasury can issue. In other words it’s a mechanism to limit government spending. When the debt limit is reached, some extraordinary measures should be adopted both for financing government expenditures and for paying previous obligations. Moreover the debt ceiling limit the payment of issued obligations but not the issue of new obligations. The impossibility to adopt extraordinary measures when the debt limit is hit cause a sovereign default. And of course you can imagine the impact of the US government default on the world economy.
Let’s turn to news. In 1995, 2011 and 2013 there were three debt ceiling crisis. In 1995 the Republican President Bill Clinton and the Democratic Congress had a first dispute on debt ceiling. At the end a balanced budget agreement was proposed and more federal spending were cut.
In 2011 another debate on debt ceiling took place. The federal spending were close to hit the debt limit. Therefore in 2011 a negotiation on how to solve the crisis took place. The crisis solved with the introduction of the Budget Control Act. The debt ceiling was raised from $14.3 trillion to $14.7 trillion with the opportunity of increasing it in the next months. Moreover the Budget Control Act required spending cuts by $900 billion over the next 10 years and a special committee in order to identify further cuts. Another consequence was on the US rating. For the first time, a rating agency such as Standard and Poor’s cut the US rating from AAA to AA+. So for the first time, one of the top world economy has been shaken.
Turning to 2013 and to the last debt ceiling crisis.
On December 31, 2012 the government technically reached the debt ceiling.
January 2013: it was the beginning of a very long and debated year on debt ceiling. New extraordinary measures had to be adopted.
On February 4, 2013 with the “No Budget, No Pay Act of 2013” the US debt ceiling was suspended up to May 18, 2013.
On May 19, 2013 the debt ceiling was reinstated. The limit was of $16.7 trillion. That’s in order to respect the borrowing made during the suspended period. No previsions were made about debt ceiling next commitments. In any case it was sure that “extraordinary measures” had to be adopted again. In Summer Treasury warned Congress about a possible US default. According expectations it was required to raise the debt ceiling.
On October 16, 2013 with the Continuing Appropriation Act 2014 the debt ceiling debt ended: the debt ceiling was suspended up to February 7, 2014 and at same government agencies could receive funds until January 15, 2014.
But that’s not all. On December 20, 2013 the US Treasury Secretary announced that when the debt ceiling suspension will expire on February 7, 2014 the US will hit the debt limit again. Therefore other “extraordinary measures” will occur. The Congress will probably raise the nation’s borrowing limit. This for avoiding the US default.
The US federal debt seems to be an endless problem. This is because up to now the government has provided short term solutions. Probably in the future the government will suspend the debt ceiling again. It’s like to postpone the problem without solving it. The worst scenario would be the US default. When the US debt will increase so much to become unmanageable the default is the only way. The US economy differs from the emerging economies such as the Chinese economy, the Indian economy and so on. That is because the US economy such as other developed world economy have slow economic growth. That’s the problem. Keeping constant taxation laws, Increasing government debt cannot be compensated by increasing tax revenues. That’s due to the slow GDP increases.
Changing taxation or cutting federal spending are a huge political matter.
Look at the following chart.
US Debt/GDP – debt ceiling forecasting – Source: FRED
It’s to you answering to the question: will the US default be the end of the never-ending story?
The US debt ceiling soap-opera: part 2
The first episode of the debt ceiling saga finished in this way: “On December 20, 2013 the US Treasury Secretary announced that when the debt ceiling suspension will expire on February 7, 2014 the US will hit the debt limit again. Therefore other “extraordinary measures” will occur. The Congress will probably raise the nation’s borrowing limit. This for avoiding the US default.”
On 7th February, 2014 the debt ceiling circus was back in town. February 7th, 2014: the US Treasury Secretary announced that if lawmakers don’t raise the debt ceiling, after February 27th the US economy will be jeopardized. That’s because the US government would not be able to pay the country’s bills in full and respecting time (thus U.S. obligations default – US default).
Three scenarios were possible:
– scenario n. 1: debt ceiling suspension;
– scenario n. 2: debt ceiling rise;
– scenario n. 3: no governmental maneuver on the debt ceiling, nor suspension neither rise.
Scenarios n. 1 and n. 2. Debt ceiling suspension and rise are technically different but practically have the same effects. Thanks to suspension the Treasury can borrow what it needs in order to pay bills and after the suspension expiration the debt is equal to the old cap plus the amount of Treasury borrowed during the suspension period. Debt ceiling rise is simply the rise of the debt cap. Both debt ceiling suspension or debt ceiling rise are devices for avoiding USA default. Devices because recurring to new debt for paying old debts is like to get a new credit card in order to pay the credit cards the US government already has. In other words, US debts are paid getting to neck in debts.
Scenario n. 3, was about no maneuvers. In this case consequences would be US default thus a global economic and financial crisis.
So what happened?
February 11, 2014: the House voted to suspend the government debt cap until March 2015, without conditions. Out of curiosity: on February 2014 the US debt was of $17,2 trillion: $17,211,558,177,668.77.
February 12, 2014: after the unavoidable struggle between Democrats and Republicans, as expected, the Senate approved suspension of the US debt ceiling.
Debt ceiling suspension is not a new. The first episode of the debt ceiling saga went over debt ceiling suspension in 2013. In any case debt ceiling history is very long. In the 20th century debt ceiling is increased more or less 90 times. What is alarming is the exponential increase of the debt. In fact, debts don’t increase linearly but exponentially. Thus the need of suspending/rising the debt is required at shorter intervals that’s because US debt increases faster. In the last twenty years (1993-2013) Congress raised debt 10 times.
Now, on February 2014 debt ceiling has suspended up to March 2015. So what’s the point? The point is, up to when will the US debt be affordable? In March 2015 what will happen? Another debt ceiling crisis? Maybe..
Maybe.. something “big” will happen. Big especially for your ass. So big that will cancel all the US debts.
Be aware, have plans,