Research paper
Introduction
Being a study of the economy as a whole, and considering aggregated indexes as GDP, unemployment rates and price indices, the macroeconomics depicts an overall state of the current economic situation.
The debt ceiling
Even though, after the Great Recession of 2008, the U.S government is desperately trying to stabilize the situation using various fiscal and monetary measures, it still fails to spend less money, thus borrowing more and more from its creditors every year. Then it comes to the question of raising the debt ceiling in order to borrow more, and this procedure is known for quite some time now, but it started to be painful since 2011 (first time there was a debate on the approval of the borrowing limit) and it has stayed the same since then.
The decision on whether to raise or maintain the existing debt ceiling should be made in the beginning of a new financial year, and for previous two years the decision itself was made fairly easy (even considering the existed debates), but this year the situation changed critically. The U.S President’s health care program (Affordable Care Act) - a law passed to lower the medical care spending for the U.S, and to provide health insurance for all Americans, is being a key disagreement point in Washington budget negotiations (actually the president’s refusal to defund the program), and because of which has the U.S government was driven into the first shutdown in 17 years.
Republicans in the House of Representatives, supported by a core of tea party conservatives, are persuading Obama to accept changes to the existing health care law that he pushed through three years ago. Obama refuses to consider any deal linking the health care law to routine legislation needed to extend government funding. The most direct impact of the shutdown is 800,000 federal workers left home without being paid (adding up to the already existing U.S unemployment rate of 7.3%). Since the spending for public sector workers goes to the official calculations of the size of the economy as government spending, these profits will feed into third-quarter GDP; nevertheless, according to Goldman Sachs, every day of the government shutdown costs around $400m to economic output in lost pay alone, thus cutting the economic growth by 0.2% points weekly (second week of the shutdown). The longer the closure is, the more widely it will damage the economy, as those federal workers will tighten their belts, companies, relying on federal contracts will become nervous and people will fear the possibility of a prolonged budget crisis.
But the situation has escalated even further and ran into the U.S President’s refusal to raise the debt ceiling, and that is a much more serious problem than all others combined. The United States debt limit currently sits at $16.7 trillion and was hit on 19th of May and since that date the Treasury has been undertaking “extraordinary measures” to keep the government functioning. This involved delaying payments, as well as prioritizing payments, drawing on a $23 billion emergency fund and an emergency $9 billion debt swap. Despite the measures taken, the Treasury was warned that it would eventually run out of funds and will be unable to meet close to a third of the $80m worth of payments it makes each month; the US Treasury secretary, Jack Lew, warned again on October 6th that by October 17th the U.S will be left with about $30bn in cash to meet its obligations – which are about $60bn a day – unless Congress acts soon to increase the US’s borrowing limit, thus October 17th represents the day those measures will no longer be effective enough to keep the country from defaulting on its debt.
A possible failure to raise the borrowing limit could result in the US missing payments on its debt, which can make the U.S interest rates skyrocket, freeze credit markets, and plummet the value of the dollar. The U.S stock markets did fall following the continued shutdown: the Dow Jones Industrial Average fell 136.34 points, or 0.9%, to 14,936.24; all the other US markets closed down, with the S&P 500 dropping 37.38 points (0.98%). Most European and Asian markets shut down as rises in U.S Treasury notes and gold prices were noticed, both traditionally seen as safe havens, but in case there is a default, neither the U.S Treasury notes nor the U.S Government bonds, which hold most of the U.S debt will be safe anymore, and therefore will lead to a chaos amongst the U.S creditors.
The situation with creditors could worsen significantly if the government fails to resolve the issue. It happened before with last debt ceiling debacle in 2011, which actually cost the US its AAA credit rating. At the time, China, the biggest U.S creditor, was holding more than $1trillion in IOUs, since then the country has been taking urgent steps towards stabilizing their currency, which would remove the need for China to gather the enormous reserves of American assets and will eventually leave U.S bonds without a generous customer, thus significantly pushing up the cost of borrowing for America. That is the exact reason for American government to start considering financial diet in the future, which will lead to a lesser borrowing need and that will eventually cure the economy.
Conclusion
In the light of the latest news there is a hope that the U.S government will make a correct and responsible decision of actually raising the debt ceiling, therefore preventing the world’s biggest economy from defaulting for the first time in 225 years, and saving the world’s economy from a possibility of a far worse scenario that took place in 2008.
References
Erlanger, S. (2013, October 7). Default Threat Generates Fear Around Globe. The New York Times [New York]. Retrieved from http://www.nytimes.com/2013/10/08/us/politics/default-threat-makes-impasse-in-washington-a-global-fear.html?ref=us
Olen, J. (2013, October 8). The Debt Ceiling Debacle May Make the Government Shutdown Look Like a Walk in the Park. Economy In Crisis [New York]. Retrieved from http://economyincrisis.org/content/the-debt-ceiling-debacle-may-make-the-government-shutdown-look-like-a-walk-in-the-park
Rushe, D. (2013, October 7). China says US has 'responsibility' to resolve debt ceiling row.The Guardian [New York]. Retrieved from http://www.theguardian.com/world/2013/oct/07/china-us-responsibility-debt-ceiling-row
