Free Custom «The U.S. Debt Crisis» Essay Paper

The U.S. debt crisis is proving to be of significant effect on the overall economy of the United States. The overall effect of the crisis is that the government could soon run out of money if the crisis is not resolved. However, the looming battle between White House and the Congress is proving to be a great stumbling block towards the resolution of the crisis. The U.S. government has an estimated $14.3tn in debt which is almost the legal limit that the government can accrue at any given time. This has prompted the government to keep and shield the U.S. economy most significantly by Treasury secretary Tim Geithner managing to stave off default by suspending payments into two federal pension funds. Tim also pledged to repay the money once the Congress approved a higher debt ceiling. However, raising the debt limit comes with its own financial and economical implications. Under the U.S. Constitution, all government borrowing has to be approved by the Congress. However, the protracted stand off between the republicans and the democrats has had an effect on the overall implementation of monetary policies. The borrowing limit was originally introduced in 1917 and was intended to make it easier for the government to fund its undertakings during the 1^st World War. Since then, the debt limit has been re-adjusted several times with respect to different financial and economic situations. Historically, Congress voted to have the debt limit lowered instead of being increased.

 

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Today, the effects of the financial crisis and recession have led to the soaring of government spending. In addition, tax revenues have suffered a situation that has seen an increase in government deficit. The approach taken by the republicans who control the House of Representatives is that the government must first cut the deficit before any debt limit increment. However, both the republicans and the democrats agree that the debt crisis must be taken under control. Both sides insist that the government must not increase taxes and rather should concentrate on cutting on its spending. The implications of the standoff between the Congress and White House, if not solved, will will lead to the situation that the government will no longer have money in its reserve for the provision of public service and administration. The U.S. treasury indicates that the government will no longer be able to pay its bills if the current crisis is not resolved soon. This implies that the government will not be able to pay for social security payments, Medicare, military salaries and debt interest payments. The whole debt crisis issue has had investors very nervous regarding the situation as well as has put pressure on the dollar and put America’s credit rating on a negative perspective. The long term effect of the debt crisis is that commercial banks would technically be barred from using US debt as collateral with central banks. However, the government is implementing austerity measures that will shield the long-term effects of the crisis if a solution is not arrived soon.

U.S. is also experiencing credit crisis in the wake of renewed fears of another economic crisis. Fed governor Sarah Raskin warned that a considerable number of American citizens do not have access to affordable credit. The warnings by the Fed governor are a repeat of the sentiments of a banking analyst Meredith Whitney who forecasted a few years ago that most U.S. citizens would eventually drop out of the lending system. Now most American citizens do not meet lending or regulatory qualifications anymore. This situation was caused by the increasing rates of unemployment. According to the US Labor Department, more than 14 million Americans were currently without a job and another 8.5 million were underemployed (The US Labor Department). This has resulted in thousands and thousands of American citizens giving up on looking for a job. Most of the people currently face loan problems after the US authorities tightened lending standards in the wake of the financial crisis. This is in an overall attempt by the government to prevent the financial crisis brought about by the crisis in the sub-lending rates in the housing sector. However, analysts warn that the government should try to strike a balance between the credit crisis and the unemployment levels as the two should work proportionally and not aversively. Limiting the access of credit to the people would have significant effects on the market outlook of the economy. On the other hand, an increase in unemployment levels would adversely affect the economy as a whole in a global outlook and these affect foreign investments.

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The government in an attempt to avert a further crisis warned of potential default of outstanding US sovereign debt if a political agreement between Republicans and Democrats could not be reached (Gold Research News). This is amidst reports by the ratings agency Standard & Poor´s (S&P) that it would significantly downgrade the U.S. credit rating if the stand off regarding the debt ceiling was not resolved. In an occurrence of this, financial markets, especially the stock markets, would be drastically affected. An effect is considered to be much worse than the collapse of investment bank Lehman Brothers in 2008. Despite the situation at hand, Greek parliament´s passage of extensive budget cuts provided relief for financial markets, especially stock markets (Gold Research News). The U.S government therefore has an uphill task in shielding the country’s economy from both internal factors such as the debt and lending crisis as well as external factors such as worsening of Euro zone debt crisis.