On Friday, Jan. 18 the U.S. House of Representatives agreed to vote on raising the country’s debt ceiling for another three months. This plan is meant to give Congress the chance to negotiate a more viable budget plan, according to The New York Times. According to the Council on Foreign Relations, the debt ceiling is the maximum amount of debt the U.S. can incur. This debt ceiling increase is worrisome news for many Americans, who view the rising deficit and hotly-debated fiscal cliff as signs of a weakening economy and ineffective national banking policies.
However, it is important to note that the American economic situation is complex and alarming, but not unprecedented. According to a congressional research report published Dec. 27, 2012, the debt ceiling was made in 1939 and has been raised 11 times since its creation, rising every year since 2002. The report indicates that America is still recovering from the 2007-09 recession, and high federal debt was an expected side-effect of governmental bailout policies. It goes on to say that if federal banking policies do not change this year, the debt ceiling will continue to require increases, as has been the case for the last decade.
Therefore, an overhaul of banking policies needs to occur before the cycle of deficit spending can end. On Friday, House Republicans agreed to raise the debt ceiling only with an added provision to the bill that states that no lawmaker can earn money without proposing a debt plan, called the “no budget, no pay” provision by The New York Times, to prevent reckless borrowing and spending. Obama will introduce his 10 year budget plan in February, but the Senate has refused to debate the plan on its floor for four years.
Unfortunately, the United States debt ceiling crisis does not exist in a vacuum; it has significant international consequences. According to the Council on Foreign Relations, the increased debt ceiling causes depreciation of the dollar. Though this depreciation leads to increased demand for American goods by producing a smaller price tag, it also means higher borrowing costs as incurred by increased interest rates. Another international worry is that Japan and China will stop storing surplus funds in the United States, which used to be viewed as the safest, most stable economy. If the debt ceiling continues to rise or if the United States fails to pass a budget plan before the three month deadline is reached, it could cause foreign creditors to close American accounts.
It is important for the financial market to remain strong both at home and on the international stage. However, it is questionable how much affect it will have on the economy. According to JCU’s Andrew Welki of the economics and finance. “[The debt ceiling is] basically a political issue. It has become increasingly contentious because of partisan politics.” Therefore, only time will tell what the consequences will be.
Information from The New York Times was used in this report.