In August of 2011, I wrote a post on the debt ceiling crisis, where, ultimately, Congress allowed the US treasury to borrow $2.4 trillion, moving the overall debt cap to $16.4 trillion. This decision came after lot of politics, brinksmanship, credit rating downgrade and appointment of a Congressional committee to come up with a plan to fix the problem. If I remember right, that committee didn’t do anything worth writing.
Now again, the $16.4 trillion has been reached as of May 2013 and the debt ceiling debate is coming up again this month. I think the politics will be very different this time. Why?
Earlier this week, the Congress refused to come to a consensus as for Federal Budget for the current FY. This being Obama’s last term, he now feels like he has nothing to lose by staying close to his ideology, including most significantly, his position on Affordable Care Act aka Obamacare. The shutdown that started on 10/1 and still underway, is what we call partial shutdown. Partial shutdown means only the essential federal organizations will be allowed to function, until the Congress finds a way of funding. The federal government has about 3.2 million workers, and nearly 800,000 of them are now on unpaid furlough.
But the reality is that the issue of shutdown is largely an internal issue — it doesn’t affect the global market — other than by the reduced GDP caused by people holding their wallets shut. In fact, on some level, this is a inconsequential issue, because most things that affect the economy and the individuals are managed by the states, so the life of an average American has not changed, save the people who are directly affected.
However, the issue of debt ceiling is real. The entire world will be affected by it. To begin with, if the same type of standoff happens for debt ceiling, US will actually start defaulting its debt obligations — creditors will be infuriated, credit ratings might go down again and the negative effect will pervade into the bond market, stock market and start impacting the forex value of the dollar. As dollar cheapens, imports will become more expensive, trade/ current deficit will widen and US will become more indebted to its creditors than ever. Quantitative Easing is already at its fullest potential, so no further artificial easing is possible. And even if concoct a new way of easing the economy, it will only further devaluate the market and the economy.
All told, US is onto another wave of events that will be detrimental to the economy, not only that of its own, but of the entire world. The big date is 10/17 — stay tuned for more updates.