With the $16.4 trillion debt ceiling getting restored on May
19, alarm bells have started tolling across the country to
address this highly politicized and polarizing issue to give it a
fresh lease of life.
However, calming the frayed nerves, the U.S. Treasury has
confirmed recently that higher-than-expected tax receipts and a
hefty one-time payment by Fannie Mae to the tune of about $59.4
billion has deferred hitting the debt ceiling until at least the
But will delaying the inevitable be really helpful for the U.S.
unless some corrective measures are implemented? Let us dig a
little deep to find answers to these questions.
The U.S. Treasury has defined the debt limit as "the total amount
of money that the U.S. government is authorized to borrow to meet
its existing legal obligations, including Social Security and
Medicare benefits, military salaries, interest on the national
debt, tax refunds, and other payments."
The financial prudence behind having a debt ceiling lies in
the fact that it allows a form of accountability and enables the
government to borrow further to meet its revenue shortfall,
thereby giving it an opportunity to identify and target the
underlying causes for the overspending. Or is it?
If having the diction of debt ceiling would have helped, the U.S.
would not have required modifying it again and again. History
reveals that since 1960 Congress has acted 78 separate times to
permanently raise, temporarily extend, or revise the debt limit -
49 times under Republican presidents and 29 times under
Democrats. So the obvious question then arises: Is the debt
ceiling at all required?
The government seemed to have learned from its past mistakes, and
the U.S. had a balanced federal budget with expenses tallying
exactly with income in 2001.
But, as they say, 'History repeats itself' -- the U.S. economy
again fell back in to the trap primarily due to three factors:
the Bush-era tax cuts that added roughly $2 trillion to the
national debt over the last decade; the Gulf wars in Iraq and
Afghanistan, which added an additional $1.1 trillion; and the
Great Recession, which led to the collapse of several financial
giants like Lehman Brothers and Merrill Lynch, which was later
Bank of America Corp.
). Several other banks like
JPMorgan Chase & Co.
) also felt the after-effects of the prolonged Great Recession.
The situation snowballed in to a crisis in 2011 when a periodic
increase in debt ceiling was stalled by the Republicans,
demanding a significant cut in federal spending. The crisis was
eventually averted by the intervention of the President, but not
until the U.S. had its casualty of a credit rating downgrade by
Standard & Poors.
The stage is again set for a showdown this fall, but the question
remains: Is the U.S. prepared to riseup at last or sink further
Although time is the best judge for this trillion-dollar
question, the U.S. economy got a lifeline when data from the
Treasury revealed that receipts for the six-month period ending
Mar 2013 aggregated $1.2 trillion, up 12.4% year over year,
versus a government spending of $1.8 trillion. This is equivalent
to a year-to-date budget deficit of about $600 billion, the
lowest since 2008.
The better-than-expected revenues were attributable to higher
income tax payments, up 14.7% year over year, and improved
corporate profit taxes, up 18.6% year over year, in addition to a
significant contribution from Fannie Mae.
A relatively smaller yet noteworthy factor that pushed the
revenue receipts was the underlying growth in the economy.
Primarily, a dip in unemployment figures and ever-increasing
stock price indices are the positive signs.
This averted possible 'extraordinary measures' by the Treasury as
of now, allowing the federal government to finance its operations
for about two months even after reaching the debt ceiling. These
include 1) suspension of the sale of State and Local Government
Series Treasury securities; 2) redemption of existing and the
suspension of new investments in pension funds like the Civil
Service Retirement and Disability Fund and the Postal Service
Retirees Health Benefit Fund; 3) suspension of reinvestment of
the Government Securities Investment Fund and 4) suspension of
reinvestment of the Exchange Stabilization Fund.
But will the Treasury be eventually forced to utilize these
measures if an amicable solution of raising the debt limit is not
reached between the Republicans and Democrats sometime in
As a separate cushion, the Republicans have deftly passed a bill
that would allow the government to pay interest on debts as well
as prop up Social Security payments, even if a status quo is
maintained for the federal borrowing limit. Although the bill
promises to prevent any missed obligations that could trigger a
formal default and pre-empt any potential debilitating shock to
the economy, it eventually raises the debt limit by pushing these
payments outside its purview.
In other words, it would be detrimental to the economy,
earning it the vicious tag of a "default" by another name,
probably due to which the White House has promised to veto it.
No matter what the warring political parties do, the thorny issue
of a potential crisis due to a debt-ceiling hit still persists.
The short-term initiatives are likely to offer a temporary
respite, but the ramifications could lead a death-blow to the
economy unless a balanced fiscal policy is eked out.
As the U.S. stocks continue their unrelenting rally of
reaching new all-time highs in most major indices, the market
might be vulnerable to a correction any time soon. Only time will
tell whether debt-ceiling alarm bells are indeed trigger for such
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