Introduction
On the first day of August 2011, the House of Representatives passed a bill to raise the nation’s debt ceiling by $400 billion to $14.294 trillion (Levit, 2012, p.21). The bill was referred to as the Budget Control Act of 2011. Congress had engaged in extensive discussions and negotiations over increasing the debt ceiling and consequently lowering the federal deficit and the increasing national debt. However, they were cut short by the August 2, 2011 deadline that marked the date when the US borrowing would reach the debt ceiling as speculated by the treasury (Levit, 2012, p.23). President Obama did not hesitate to sign and pass the bill.
Economists praised the legislation saying that had the bill not been passed, then the country would have suffered a catastrophic economic crisis. The bill increased the debt ceiling by $400 billion to $14.694 trillion. This bill was intended to avail more money to the federal government to finance its operations that were earlier approved by the senate. A second increase would enable the government to cover its expenses for the period ending in February 2012 (Levit, 2012, p.29). However, Congress had the mandate to reject the second increase. The debt raising had many implications to the financial markets as discussed below.
Discussion
Failure to pass the bill would have severe consequences on the economy of the US. It would have possibly initiated another financial crisis similar to that of 2007 that would harm the economy (Masters, 2011, p.45). Raising the debt ceiling has several implications for the financial markets. First, it will create momentous financial uncertainty in the financial stock and bonds markets (Irving and Engel, 2011, p.44).
This uncertainty will exert pressure on the market and the interest rates of various portfolios. In addition, the increase will raise the costs of borrowing money in the future and the costs of starting and running capital for businesses and homebuyers with insufficient money to sustain their operations (Masters, 2011, p.52). The increased interest rates would necessitate the use of tax to repay the debt rather than investing in better projects such as infrastructure, education, and healthcare.
Secondly, the raise will decrease the value of the US dollar and lower its competitive edge against other international currencies (Masters, 2011, p.55). This will result from decreased demand for US treasuries. The raise has a positive implication in that it would benefit exporters due to the currency depreciation. However, the same exporters would feel the pressure of increased costs of borrowing that result from high-interest rates. In the long-term, a possible effect would be the danger to the status of the US dollar as the reserve currency of the world (Masters, 2011, p.58). This would be because of the continued devaluation of the dollar.
I think the raising of the debt ceiling will affect the financial markets negatively and will not benefit them as projected. First, I think it will raise inflation further from the current level because it will possibly create widespread uncertainty in the financial markets. Secondly, it may present difficulties to the government in their ability to meet budgetary demands in the future because of increased debt and loss of confidence by investors in the markets. Finally, I think raising the debt ceiling will decrease the confidence of foreign investors in the US markets. This may move them to withdraw their investments from the US and this move will present a negative impact on the dollar. It will decrease its value and increase competition from other currencies for the international reserve currency status.
The US financial markets would possibly not function efficiently. The treasury would have limited options in borrowing money to fund government projects and programs (Irving and Engel, 2011, p.48). This would harm the government because it borrows money to cover the deficit between its spending and income. If the bill did not pass, it would have some implications. The government would be pushed to either cut on spending or default on some of its financial obligations.
Cutting on government spending would possibly present serious financial repercussions to the economy. Defaulting on some financial obligations could cripple the US economy and possibly affect the world markets immensely (Irving and Engel, 2011, p.63). These two options would present negative consequences on the domestic and the international financial markets. Opting to default would harm the bonds and stock market, devalue the dollar, and harm investors’ portfolios.
Conclusion
In August 2011, President Obama signed and passed a bill that raised the nation’s debt ceiling. (Levit, 2012, p.21). Congress had engaged in extensive discussions and negotiations over increasing the debt ceiling and consequently lowering the federal deficit and the increasing national debt. However, they were cut short by the August 2, 2011 deadline that marked the date when the US borrowing would reach the debt ceiling as speculated by the treasury. It would have possibly initiated another financial crisis similar to that of 2007 that would harm the economy. Failure to pass the bill would present adverse consequences to the financial markets. It could have initiated a devaluation of the dollar, harm the bonds market, stock market, and affect the domestic and international markets immensely.
References
Irving, S., and Engel, G. (2011). Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market. New York: DIANE Publishing.
Levit, M. (2012). Reaching the Debt Limit: Background and Potential Effects on Government Operations. New York: DIANE Publishing.
Masters, J. (2011). U.S. Debt Ceiling: Costs and Consequences. Web.