For the last fortnight or so, the debt issue has been sweeping the attention of every curious guy in the nation, and perhaps in the world. The actual issue is complex, but not difficult to understand. Before you get to the actual explanation of the issue, it is important that you understand who the major players of this drama are.
Administration — You will hear references to the President or White House or Government, or in the current term as Obama — all of which mean the same in this context. The Administration needs money to run the government and by extension, the country. Government makes money primarily through tax revenue. It has other avenues as well, but let’s keep this simple. Since inception, US has been spending more than it makes, to a point where it depends on its ability to borrow money to run the country.
Lenders — If the government borrows money, there should be someone to give it. Who are they? Within the country, the US owes to its people (social security), businesses (interests, contracts) and to itself (trust funds etc..). But more importantly, various countries fund the US — either through investments or in exchange for securities (such as treasury bills, bonds and promissory notes). There is a growing list of countries that own a piece of US — among which China, Japan and UK are significant.
Treasury — Treasury is the department within the administration that, among other things, has the powers to create securities that other countries can buy by paying cash. Their borrowing power is limited by how much the administration allows them to — a number we now infamously know as “debt ceiling”. For you and me, this is simply the line of credit we have on our credit cards.
The government constantly has to do a balancing act between borrowing more and reducing expenses, just like we reduce shopping, when we get behind on credit card dues. US presidents have historically failed at doing this — resulting in an ever-increasing debt level, which was less than $900 billion as of 30 years ago. Presidents — red and blue — have increased the debt significantly during their presidencies, to almost $14 trillion as of yesterday.
Obama, since he came into power 3 years ago, has already raised the debt levels twice and the current attempt is the 3rd.
Why does Obama want to increase the debt ceiling?
Simply because his government does not have enough money to run the country. By increasing it, he thinks he will have enough money to run the country up to 2013, so he can delay the debt issue past the 2012 presidential elections, to boost his chances of winning for the second term. On the other hand, election or not, not increasing the ceiling will make the government default in its loans and will have a domino effect on the government, the country and the world.
Why is there such a fuss raising the debt ceiling and why?
Though everyone agrees the ceiling has to be raised, there is not enough agreement on the cost-control proposals which will affect how much the government is able to spend on departments, including that of defense. A decision as big as this has to gain majority votes in the Congress, which is represented both by Republicans and Democrats. Republicans have an incentive in not making this work, because in doing so, the country will at best deteriorate and at worst collapse, due to looming debts, both internal and external. That would be seen as a strong sign of Obama’s failure to protect the nation; and preclude any chances of his winning again.
What happened today?
After several weeks of drama like you see in action movies, the law to raise the debt ceiling was signed by the president at 3pm, almost before the day is over. The bi-partisan agreement includes a short-term plan to raise debts by about $2.4 trillion, with lot of fine prints. Fine prints include cost control measures to the tune of $2.1 trillion over 10 years, appointing a congressional committee to come up with a plan by November 2011, with a long-term view of moving America from red to black.
Will America move from red to black? Has Obama salvaged his image by getting the bill passed or did he create irreversible damage anyways? Will today’s events help continue the AAA rating of the government? What do you think?
Disclaimer: Please realize that this post skips subtler details of the bill, and the underlying politics to provide a generic explanation of what is happening with US economy.