The word "debt-ceiling" now a days is getting a lot of attention from the media and politicians. After the Murdoch phone scandal, the debt-ceiling is on the front cover of every newspaper. Not because nothing can be done, but simply because our politicians have failed to find a common ground to agree on.
First, we need to understand what is the debt-ceiling. It’s the limit set by the Congress on how much we can spend. If the debt-ceiling is not raised, the U.S. will basically default on 2nd August, because they cannot borrow more as the limit is already reached. Republicans say that the government will continue to pay interest on the debt, pay for the Medicare, pay for the Armed forces, while the Democrats say we can’t pay our bills. Hell, even the Republicans say we can pay our bills, which in fact is true.
So, why a big issue about this? The House of the Representative (a total of 435) is ruled by the Republicans. Essentially, the Republicans are using the debt-ceiling as a hostage for future spending cuts. Fine with me, but that doesn’t mean we can’t raise the debt-ceiling. There has been 10-15 bills that have been floated around in the last three weeks, talking about how the spending cuts we will done over the next 10-year period. Democrats rejected them because it is not a balanced approach in creating a budget for the next decade. How much can you cut without generating additional revenues? So, finally Mr. Boehner, the Speaker of the House, got his own bill shot down by the Republicans. Basically, there is a rift in the Republican Party, and some of them feel threatened by the Tea Party—a party of White conservatives.
How does it affect a common man? Well, it does, but not directly. For that, let us first consider the scenario of the U.S. default on 2nd August. First, the U.S. will lose its AAA rating and the US debt rating will be downgraded to an AA rating, which essentially means the cost of borrowing will go up; interest rates will go up; banks will have to increase the rates etc. Bondholders will demand interest on their money, which will lead to sell off in Treasuries and other government bonds. Big investment companies and banks buy government bonds and Treasuries, and it will be lead to increased redemption of the assets. That’s why, the market has been jittery in the last week or so, because banks and brokers are getting ready for cash redemptions from their clients. This will trigger a massive sell-off in all the major markets in the world. Second, the default essentially means that the unemployment will continue to suffer, as companies will get more conservative in their approach. Third, the infusion of foreign investment will go down (in the form of Sovereign Funds) that will slow down the growth considerably. Finally, this affects the global economy, because of the associated ripple effect, and dependence of foreign markets on the U.S.
Is this is an apocalypse? Absolutely not. Not even close. But it is going to put economy back in recession because 535 idiots (435 representatives + 100 senate members) cannot think about the nation. Countries have defaulted before and they have come out stronger. Also, during Reagan’s tenure, the debt-ceiling was raised 17 times; 7 times during the Bush era. So, you might ask what is the big fuss? Republicans don’t want Obama to win the second term and they are using anything for their political gains.
