Why Debt Ceiling is Much Worse than the Government Shutdown Crisis?

By | October 8, 2013

The Government Shutdown earlier this week was not the only crisis that we need to worry about! The Treasury Department came up with a warning sign concerning the debt ceiling of the country.

The government expenses crossed the current debt ceiling of $16.999 Trillion in May itself. It has only been because of the creative financing techniques used by the Treasury Department that the government could manage until now. However, the Treasury Department has made it clear that these measures will not be sufficient and the government will reach the maximum debt ceiling on 17 Oct.

Without sufficient money to spend, the government might default on its legal obligations and it could generate a grievous financial shock for the overall economy!

Why Debt Ceiling is Much Worse than the Government Shutdown Crisis?

Lew Hammers: Why Debt Ceiling is Much Worse than the Government Shutdown Crisis?

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Concept of Debt Ceiling

 Debt Ceiling signifies the maximum amount of money that the United States Government is allowed to borrow with the sale of Treasury Bonds. The debt-ceiling limit has been changed several times because of the increasing expenses of the government. In August 2011, Congress voted to raise the amount of debt ceiling up to $16.7 trillion.

According to the expert estimations, the government will have $30 billion considering the fact that its current daily expenditure stands at $60 billion. Without an increase in the debt-ceiling limit, the government might default on its necessary expenditure. The only available option would be to delay the payments until a complete day’s expenses can be paid off.

What are the upcoming obligations of the Government?

The Government is required to make a payment of $12 billion for the social security benefits on 23 October. In addition to it, the government has to make a payment of $6 billion as the interest for government issued bonds. In case of failure in making either of these payments, the government might default over its obligations and it is an important problem to attend.

According to the 14th Amendment, “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Under such circumstances, the President of the US would be required to make the payment for the interests incurred on government bonds.

Is this the first debt-ceiling crisis?

The same problem originated in August 2011 when the government delayed increasing the debt-ceiling limit until the last moment. A similar scenario occurred in 1979 and the Treasury Department accidentally missed an interest payment. However, the government has never defaulted nor been unable to pay off its obligations.

What is the reaction of the Wall Street on Debt Ceiling?

The common trend is to witness a plunge in the stock market in the event of default. The current market conditions indicate a belief in Congress and the market is sure that the limit will be lifted before 17 October. However, the poor performance of the Standard & Poor 500-stock index and the increase in the prices of credit default swaps indicate a change of mood.

The experts are arguing over the impact of a default on the US economy. Let us hope that the Senate and the Republicans would end the government shutdown and increase the debt ceiling before any further loss.

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