The US government recently announced the increase in debt ceiling to avoid default on their debts. Debt ceiling is the legal upper cap on the amount of debt the government of the United States of America may borrow. The limit initially required a nod from the Congress for every increase, but with the onset of the world war 1, to provide more flexibility, most types of borrowings were given blanket approval, so long as the raise fell within an established limit.
The established credit limit was $ 14.3 trillion, and the debts of the nation were inching closer to the value. This was a matter of grave concern since once the limit is reached; the government would not be permitted to use borrowed funds, and the borrower would be at default, impairing credit ratings and market trends.
In the past, the debt ceiling has been raised several times from less than a trillion in the 1980s to over $ 6 trillion in the 1990s. But the scenario this time is different, due to the increase in debt compared with the current market size and economy. Due to the fact that the budget is shaping up to cut down funding for some favorite programs and major tax increases, the recent raise has attracted a lot of drama.
Debt ceiling has never been breached till date. Every time it came close to breaching, it has been raised so that more borrowing was permissible. In the event that the debt ceiling is breached somehow, the borrowed funds are locked from usage, thereby instilling a shortage of funds available for productive use and crippling fund movements. This would have caused an acute shortage of funds and crippled development activities. Also, contingencies would have to be put in place, to route in cash to impacted sections from capable ones, thereby reducing the cash flow in those sections and bringing down the entire market as a whole. This would send the entire fiscal sections on a cost cutting mode.
Raising the debt ceiling is a matter of the nation’s discretion. But many would debate that the debt ceiling, in a healthy environment, needs to be worked towards zero, to indicate that the markets are handling their cash flows capably and are not in deficit. By borrowing within the debt limit, the market still looks healthy, since borrowing is within prescribed limits and events are according to plan. But things look very uneasy when the borrowing is over the limit, since it would mean that the system is not functioning as was expected and it puts the entire fiscal system at risk.
Whenever the debt ceiling is raised, it is closely followed by measures to cut down on expenditure and store some money in reserves. This could lead to drastic measures, many of which would not go well with the people working in the systems. Also, morale is lost shortly after, which is redeemed after things work reasonably well. On the other hand, when debt ceiling is lowered, it is a clear indication that the system is functioning above par and therefore, everything is moving profitably.
By Chetan Sabadra and Aakansha Sahai
The established credit limit was $ 14.3 trillion, and the debts of the nation were inching closer to the value. This was a matter of grave concern since once the limit is reached; the government would not be permitted to use borrowed funds, and the borrower would be at default, impairing credit ratings and market trends.
In the past, the debt ceiling has been raised several times from less than a trillion in the 1980s to over $ 6 trillion in the 1990s. But the scenario this time is different, due to the increase in debt compared with the current market size and economy. Due to the fact that the budget is shaping up to cut down funding for some favorite programs and major tax increases, the recent raise has attracted a lot of drama.
Debt ceiling has never been breached till date. Every time it came close to breaching, it has been raised so that more borrowing was permissible. In the event that the debt ceiling is breached somehow, the borrowed funds are locked from usage, thereby instilling a shortage of funds available for productive use and crippling fund movements. This would have caused an acute shortage of funds and crippled development activities. Also, contingencies would have to be put in place, to route in cash to impacted sections from capable ones, thereby reducing the cash flow in those sections and bringing down the entire market as a whole. This would send the entire fiscal sections on a cost cutting mode.
Raising the debt ceiling is a matter of the nation’s discretion. But many would debate that the debt ceiling, in a healthy environment, needs to be worked towards zero, to indicate that the markets are handling their cash flows capably and are not in deficit. By borrowing within the debt limit, the market still looks healthy, since borrowing is within prescribed limits and events are according to plan. But things look very uneasy when the borrowing is over the limit, since it would mean that the system is not functioning as was expected and it puts the entire fiscal system at risk.
Whenever the debt ceiling is raised, it is closely followed by measures to cut down on expenditure and store some money in reserves. This could lead to drastic measures, many of which would not go well with the people working in the systems. Also, morale is lost shortly after, which is redeemed after things work reasonably well. On the other hand, when debt ceiling is lowered, it is a clear indication that the system is functioning above par and therefore, everything is moving profitably.
By Chetan Sabadra and Aakansha Sahai
Hopefully this crisis is going to help Indian economy by forcing US to withdraw from easy money policy. This will result in less spending in US market opening possibility of a hold on crude oil prices.
ReplyDeleteIf global crude oil prices are in control Indian economy can hope for few better things from controlled inflation, which will stop RBI from hiking the bank rates and increased lending to boost the market situation.
So Indians should look this crisis in an optimistic way hoping that good things will come-out soon...
If the govt increases the ceiling at their mercy, then y the concept at all? y would any govt want to have a limit? is it that some world forum makes it mandatory for every country to have the limits?
ReplyDelete@Jayanth: First of all, there is no forum in the world, which makes it mandatory for every country to have limit infact most countries have no debt ceiling. US established the concept debt ceiling during the First World War. Once the nation’s outstanding debt nears the debt ceiling, Congress must vote on, and the president must sign, a bill that raises the limit.If Congress and the president fail to agree to a debt ceiling increase, the government risks defaulting on payments to at least some of its creditors - a development that independent ratings agencies have already made clear would lead to lowering the U.S. government’s usually top-tier credit rating. Many experts say that a default followed by a lowering of the U.S. credit rating could increase the costs of borrowing for all Americans and harm the already fragile economic recovery. "The U.S. statutory debt limit is an uncommon attribute not shared by most sovereign debt issuers in that it is not tied to the budgetary process. As a result, when the government adopts a budget, the financing of the expenditures authorized is not automatically assured. While lawmakers in April approved spending appropriations for fiscal year 2011 (after continuing resolutions had allowed the government to operate since the beginning of the fiscal year), about 40 percent of this spending must be funded by borrowing. Borrowing is subject to the debt limit, with the current limit having been approved in February 2010. There is, therefore, no direct connection between the spending levels authorized by Congress and the ability of the government to fund this spending."
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