The US debt ceiling crisis: How the world’s mightiest nation may run out of money this week

Anytime between the the 3rd and the 10th of August this year, 2011, the government of the United States of America may run out of money. The estimates vary depending on who is doing the reckoning — the White House, Wall Street hacks — but either way, as with most things associated with going broke whether it be a person or an entire country, the outcomes won’t be nice. Bills won’t be paid, people will suffer, and confidence will be lost. The first two are the more obvious consequences. The US government’s obligations to its people in the form of state benefits like social security and healthcare commitments won’t be met. Businesses doing business with the government will be left unpaid. The livelihoods of people will be placed in jeopardy as the US economy’s biggest employers begin to struggle to make payrolls.

The less obvious but likely more far-reaching of the effects would be the third — erosion of confidence in the American Way. This confidence is measured by America’s credit rating, issued by a handful of influential credit-rating agencies — Standards and Poors, Moody’s Investors Service, etc. A downgrade of what is currently the “triple A” (AAA) rating (representing the highest level of confidence given to an economic entity’s ability to meet its financial obligations) enjoyed by the United States will mean a downgrade in the US’s perceived ability to pay its debts.

When a country’s perception to creditors is compromised, creditors react by compensating themselves for the heightened risk of lending money to that country. Usually this compensation comes in the form of their charging a higher interest rate to that country (or any economic entity associated with it) for money lent to it. The aggregate effect is a rippling of this increased debt burden across the financial system of that country — all the way to the end-consumer whose obligations to pay credit cards, auto loans, home loans, etc. will grow and eat into their disposable income.

That spells trouble for Filipinos who are dependent on remittances from their relatives living in the United States. The increased financial burden will reduce Filipino-American families’ predisposition to send money to their impoverished relatives back home. The crisis of confidence in the American economy will erode the value of the greenback further. This means that whatever money Fil-Ams do send will be worth less.

So how exactly does the world’s mightiest nation run out of money?

The United States operates in deficit. That is, the money it collects in the form of taxes (among other sources of income) is less than the money it owes to suppliers, its citizens, its employees, and the banks from which it borrowed money. The gap between how much money flows into its coffers and how much needs to come out of it is the “size” of this deficit. What is the size of the US’s deficit? Big. The cash inflow of the United States government is short of its outflows by about (most likely more than) one trillion dollars every year.

So how then does it normally close this gap (i.e., pay for that $1 trillion after it had used up all of the money it had)?

The United States Government borrows money to use to fill that gap. And it borrows at least that amount every year, because this shortage of money — this deficit — happens every year.

Therefore, for so long as money coming into the US Treasury is less than money that needs to come out of it, the US government will keep on borrowing and its debt will keep on growing. The US government sets limits (a debt ceiling) on how much debt it plans to take on, and only Congress can act to change this. In 2000 the debt ceiling of the US government was pegged at $6 trillion. Today it stands at $14 trillion — an astounding increase over the last decade.

Calls to lift the ceiling yet again to stave off default are being hindered by a Republican-controlled House of Representatives who made that prospect conditional on evidence of some sort of plan to reduce the annual deficit, say, by cuts in spending.

The short of it is that this “crisis” in the US is political in nature — a deadlocked Congress, and a last-ditch rush among legislators and White House execs to reach a compromise involving, among other things, legislation and measures to meet the conditions set by the Republicans and finding ways to prioritise disbursement of the remaining funds in ways that could at least mitigate the effects of a default. In any case, politics is getting in the way and contributing to a further diminishing of the image of America as a beacon of stability.

Whatever happens in the political arena, the underlying and systemic issues surrounding how the US got to this point will remain; and the simple question — How exactly does the world’s mightiest nation run out of money? — though answered in this article and in many other ways by others, will remain one that may never be addressed convincingly.

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20 Comments on “The US debt ceiling crisis: How the world’s mightiest nation may run out of money this week”

  1. It tuns out of money when a president funds two wars off budget and reduces taxes paid by the wealthiest Americans.

    It fails to solve its problems because the bell curve has assumed the shape of a dumb bell, with extremes at each end incapable of putting a higher calling, the good of the nation, above the purity of their ideology. Both left and right extreme ideologies are flawed when applied to the practical world, which operates to minimize risk, not promote it.

    The Philippine government under President Aquino functions better than the US government. It is capable of getting a lot done, as it is aligned on the priority of doing things better. And, yes, there is a lot to do.

    1. Joe,

      your comparing the the left/right wing debate going on in the US, versus Gloria bad/Noynoy good “debate” in the Philippines?

      1. Winky, in a way. The US is hamstrung by opposing political ideologies, the left and right, neither of which is inclined to budge, even if the good of the nation is at stake. President Obama is a ping pong ball, helpless because he can’t move cement. In the Philippines, Congress is aligned with President Aquino’s initiatives to do progressive things for the Philippines. I have more hope for progress in the Philippines than in the US.

      2. Maybe it’s just me, but I would rather have the Philippines progress towards debating economic strategies, versus placing all bets on this one messiah that will make everything all better. Cory, Erap etc… all played to this tune. I would however bet, that the US will still be around for a couple of decades.

      3. Ha, yes, the US has amazing strengths that are just stopped up for now. I agree that building economic strength in the Philippines is important and should be pursued side-by-side with anti-corruption initiatives.

    2. Joe,

      Just like Obama, when will you stop blaming Bush for Obama induced misery of US?

      Or blame Bush but at least support it with facts.

      What are the facts?

      (According to Washington Examiner)

      “* Obama’s stimulus, passed in his first month in office, will cost more than the entire Iraq War — more than $100 billion (15%) more.

      * Just the first two years of Obama’s stimulus cost more than the entire cost of the Iraq War under President Bush, or six years of that war.

      * Iraq War spending accounted for just 3.2% of all federal spending while it lasted.

      * Iraq War spending was not even one quarter of what we spent on Medicare in the same time frame.

      * Iraq War spending was not even 15% of the total deficit spending in that time frame. The cumulative deficit, 2003-2010, would have been four-point-something trillion dollars with or without the Iraq War.

      * The Iraq War accounts for less than 8% of the federal debt held by the public at the end of 2010 ($9.031 trillion).

      * During Bush’s Iraq years, 2003-2008, the federal government spent more on education that it did on the Iraq War. (State and local governments spent about ten times more.)

      Just some handy facts to recall during coming weeks as Obama and his congressional Democratic buddies get more desperate to put the blame for their spending policies on Bush and the war in Iraq.”

      U.S. stimulus to cost more than Iraq, Afghan war so far – http://blogs.reuters.com/frontrow/2009/01/29/us-stimulus-to-cost-more-than-iraq-afghan-war-so-far/

      Are you really allergic to facts? Or you’re just a fact-challenged one?

      If being clueless is a right, you have already passed the point of over abusing it, IMO.

      1. Joe the American: “It tuns out of money when a president FUNDS TWO WARS OFF BUDGET AND REDUCES TAXES PAID BY THE WEALTHIEST AMERICANS…”

        According to American Thinker for what they’ve sourced from US CBO (Congressional Budget Office)

        “…the WARS and TAX CUTS — were in effect from 2003 through 2007. Do you see alarming deficits or trends from 2003 through 2007 in the above chart? No. In fact, the trend through 2007 is shrinking deficits. What you see is a significant upward tick in 2008, and then an explosion in 2009. NOW, WHAT MIGHT HAVE HAPPENED BETWEEN 2007 AND 2008, AND THEN 2009?

        Democrats taking over both houses of Congress, and then the presidency, was what happened. REPUBLICANS WROTE THE BUDGETS FOR THE FISCAL YEARS THROUGH 2007. CONGRESSIONAL DEMOCRATS WROTE THE BUDGETS FOR FY 2008 AND ON. When the Democrats also took over the White House, they immediately passed an $814-billion “stimulus” (The $814 billion figure is from the same CBO report as the Iraq War costs. See sources at end of article.)”

        Go on with the reading- http://www.americanthinker.com/2010/08/iraq_the_war_that_broke_us_not.html

        You may compare your imaginary dumb bell chart with the actual CBO bar chart there.

        Who knows, in that link, you might find the true explanation to the “extremes at each end incapable of putting a higher calling, the good of the nation, above the purity of their ideology. Both left and right extreme ideologies are flawed when applied to the practical world, which operates to minimize risk, not promote it” that you have quoted.

        (I hate to say I’m enjoying refuting ideologues.)

      2. What is obvious is that the American economy boomed under the democratic administration of Bill Clinton, with a balanced budget and consistent economic growth. With the Bush’s wars, the prices of oil shot up and with the Republicans wanting to bail our failing financial institutions, budget swelled, and coupled with tax breaks for the wealthiest, the U.S. is in deep, deep, shit. Republican spin doctors could present figures to justify the destruction Bush has brought to the world and to the U.S., but nobody is going to buy that. The good is thing about America is that, it is not stuck on whether to prosecute Bush or not, unlike the Philippine government, but the Obama administration is working very hard on trying to solve the current problems facing the US courtesy of Bush. The Philippines is stuck with the past and is not dealing with our pressing issues, if the current president really wants to root out corruption, he should work hard to get FOIA passed and to give back to the tenants of Hacienda Luisita the land that was stolen from them by his oligarchic family. Now, that is what I call anti-corruption campaign with balls!!!

      3. Not only has the Iraq war ruined the U.S. economy, it has also spurred re-militarization of the world. After the cold war, military spending worldwide subsided, but with the billions and billions of dollars being poured by Bush’s cronies into private military contractors, more businesses have been created to meet the needs of the U.S. military in Iraq. What a destructive force the Bush administration has been for the world. You should be ashamed to compare medicare spending to the Iraq war. You say deficit was going down between 2003 and 2008 even with Iraq war and decrease in taxes, but was because Bush cut expenses on crucial sectors of the economy, including education and much needed upgrade of U.S. infrastructure, but when it came to bailing out big banks of Wall Street, the Bush administration did promote corporate welfare, perhaps to prevent the financial crisis from bringing the world financial institutions to ruin. We live in a global world after all. The U.S. in very serious crisis, because of Republicans, I say.

      4. Trosp, usually someone who resorts to name-calling (“clueless dude”) is not really interested in facts, or they would not turn the dialogue personal in an attempt to diminish the other person. You can research yourself to see what kind of deficit and economy Mr. Bush turned over to Mr. Obama. Catastrophic worldwide collapse. Go look up how far stocks fell, and how much was ripped out of housing values. You can find those numbers. Or refer to my blog so that I don’t have to repeat myself: http://thesocietyofhonor.blogspot.com/2011/06/freight-train-on-ice.html

        Ideologues take all kinds of shapes, your ideas being way different from my own, I confess.

      5. Clarification, there are few facts in my blog, as what happened in 2008 is pretty profound common knowledge. But the article refutes your refutation. I don’t expect you to agree with it, for sure, for you have your mind set on defending what is rattling around in there now.

      6. Joe, have I called anybody here clueless dude? Maybe I made some sort of inference through a question.

        I can suspect that goes with the way you mind works on perceiving things.

        BTW, I can only comment on what you have commented here. Your comment in this post is purely speculations or opinion at its best which seems to me you want to be perceived as facts.

        Are the sources of my facts false? Have I been misinformed and pass that misinformation to the comment readers here?

        On the other hand, is there no dishonesty in what you are claiming?

      7. Trosp, your inference was quite clear, and not really necessary. I think there are two ways to debate, one to win and prove superiority, two to discover. One is a sales job, pushing an agenda. Two is respectful of the reasons there may be disagreements, and the people making the arguments. The US Congress and Presidency this past few weeks proved how dangerous “one” can be.

  2. It’s a very sad scenario…U.S. is deeply in debt, and cannot meet its debt obligation…it will bring other currencies down, and may trigger worldwide depression…Nations, may try to look for other currencies, than the U.S. dollar, as primary currency medium of exchange…

  3. @nieves

    Perhaps, you can find something in the web that can contradict this one:

    (from Newsbusters – http://tinyurl.com/4duq43x)

    “As conservatives like myself have been saying for years, despite what the Democratic presidential candidate and his media minions were saying at the time, the early ’90s recession ended in the first quarter of 1991 long before most of the nation had ever heard of Bill Clinton.

    Counter to the totally incorrect conventional wisdom fostered by dishonest media members across the fruited plain, the Gross Domestic Product grew by 2.7 percent in the second quarter of 1991 followed by 1.7 percent in the third quarter and 1.6 percent in the fourth quarter.

    As such, before the first primary in New Hampshire, the economy was already growing.

    But that was just the beginning, for the economy was actually starting to boom before Election Day, as the GDP grew by 4.5 percent in the first quarter of 1992, 4.3 percent in the second quarter, 4.2 percent in the third quarter, and 4.3 percent in the fourth quarter.

    What this means is the economy had been growing for seven straight quarters by the time Clinton took office, with the previous four quarters experiencing what most economists consider boom-like in terms of GDP.

    Now throw in Intel expanding computer chips to a 586 platform, as well as a little invention called the router which allowed us mere mortals to log onto the Internet, and the resulting technological boom provided economic stimulus like nothing most Americans alive at the time had ever witnessed.”

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