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Commentary

The U.S. Debt Limit "Crisis"

The U.S. Debt Limit Argument is just silly. First, the concept of a debt limit is weird because no other decent country has it (other than Denmark). India’s government debt has been increasing for a long time, and that is the nature of a deficit state. The concept of government debt is that they have expenses, and they have revenues (mostly tax). When the revenues don’t make up for the expenses, there is a deficit. The deficit must be financed by debt; the government borrows money.

The U.S. has a debt ceiling in that they can’t go beyond a certain point. This is a fixed number, not relative to GDP or such. As inflation and GDP growth happen, the total debt required keeps going up and usually, the US Congress votes to increase it. (because they approved the spending in the first place, what’s the point of pissing around a stupid limit)

Not anymore, it seems. In behaviour akin to India’s parliament, the Republican party has decided that it will use this limit raising exercise to get concessions from the Obama (a democrat). Republicans have a majority in the House (equivalent to the Lok Sabha) and Democrats in the Senate (equiv. to the Rajya Sabha). A bill has to pass through both the House and the Senate, and then get approved by the President who can veto it.

Currently, the House Republicans want to put in a bill that a) doesn’t raise taxes and b) cut expenses a lot and c) a temporary increase right now with a second vote early 2012, before the presidential elections. Democrats have agreed to not raise taxes, diagree on the volume of (b) and don’t like (c) at all. But all this is just posturing, because the consequences of a no-vote before August 2, when the US Treasury has exhausted all sources of paying up for expenses, are disastrous.

Part of these expenses is interest that needs to be paid on earlier debt. If the US can’t pay such interest, it will officially have defaulted. That has repercussions for everyone, including India which owns some dollar assets. Foreigners own 47% of US debt held by the public, and one fourth of all foreign owned debt is with China. Apart from that there are pension funds, banks and other US institutions that hurt if there is a default. The US could of course pay interest at the cost of other expenses, but that means cutting expenses nearly 40%, if I have the numbers right. So it will be a default of some sort.

Note that the default is technical, because even if interest is held back there is very likely to be a move to print dollars so that the debt can be repaid later anyhow. Therefore it’s all posturing at the end of the day.

Another implication is that the US credit rating will fall from AAA to something less. But it will still be investment grade, so that changes NOTHING for anyone at all. Yes, the US is insolvent and a ponzi scheme (as are nearly ALL governments) but the rating is there because they have the right to print their currencies, and that doesn’t change with this debt ceiling vote.

The silliness is that the Republicans are holding off till the last moment, even if the Democrats seem to bend backwards. What if Obama simply vetoes the republican bill and blame them for a default? After some worldwide mini-crisis, all these fellows will vote for ANYTHING, like they voted for TARP after markets had fallen some 8%. I don’t thing either party has the balls to really stay defaulted. But in the process they will cause jitters unnecessarily – the hallmark of a world economy that depends more on presentation than reality.

What now? If you wait till Sunday, everything should be ok. But the posturing means that the Republicans and Democrats cannot be trusted to work with each other again, and that means unnecessary delays about any serious policy going forward. That though is a political problem, not an economic one, for now. So the debt ceiling piece will be resolved, and you can assume the players get more and more shrill so they can demand their little pound of flesh for their signature.

  • phani says:

    US media is covering this 24*7 but the truth is that there is no need for any discussion. All of this will be resolved in the last minute and they will raise a debt ceiling again. This is all a drama that politicians are enacting to fool people.

  • austrian_man says:

    Excellent piece deepak. Really liked it.
    All you said is true. More political posturing and nothing meaningful is achieved.