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CIAO Focus, July 2011: The U.S. Debt Crisis

The U.S. federal deficit currently stands at a record breaking $14.3 trillion and unless Democrats and Republicans can cobble together a plan to raise the debt ceiling by August 2, the Treasury will run out of money.  So far, the two sides have been unable to reach an agreement. Republicans refuse to raise the ceiling on government borrowing unless the Democrats concede to deep budget cuts and no new taxes. Democrats, on the other hand, will only agree to spending cuts as long as certain sacred cows, such as Social Security and Medicare, are not put on the chopping block, and insist on revenue increases including the elimination of tax breaks for oil and gas companies.  

President Obama has warned that a failure to break the gridlock and reach a deal by the August 2 deadline would hold up billions in disability and social security checks heaping even greater hardship on Americans hit worst by the recession. Moreover, if the Treasury coffers run dry, the United States would default on its debt obligations, badly shaking markets worldwide, damaging U.S. credit and possibly leading to a devaluation of the dollar.   

A good deal of the brinkmanship--with the exception of party ideologues--is mere political posturing.  According to a recent Gallup poll, 70 percent of registered Republicans don’t want the debt ceiling raised at all.  In reality, neither Democrats nor Republicans in Congress has any intention of letting the August 2 deadline pass without a compromise.  The stakes are simply too high. But with a presidential election coming up and America more ideologically polarized than ever before, each side will try and get all it can out of the deal even as the negotiators seemingly push the country to the edge of financial ruin. 

Robert Sedgwick
Editor, CIAO

 

From the CIAO Database:

The Liquidation of Government Debt

EIU Webinar: Lower the floor or raise the ceiling? US fiscal and economic outlook

The Pentagon and Deficit Reduction

How Dangerous Is U.S. Government Debt? The Risks of a Sudden Spike in U.S. Interest Rates

Are the advanced economies facing a lost decade?

 

Outside Sources: *

Budget, debt ceiling glossary: A cheat sheet for understanding the debates (Washington Post)
http://www.washingtonpost.com/blogs/political-economy/post/budget-debt-ceiling-glossary-a-cheat-sheet-for-understanding-the-debates/2011/04/15/AFdkB2FF_blog.html

Debt Limit Analysis (Bipartisan Policy Center)
http://www.bipartisanpolicy.org/sites/default/files/Debt Ceiling Analysis report.pdf

The Folly of U.S. Debt Brinkmanship
http://www.cfr.org/economics/folly-us-debt-brinkmanship/p25408

Country Report: United States of America (EIU)
http://www.eiu.com/report_dl.asp?issue_id=1178153502&mode=pdf

Enough Already (The Cook Political Report)
http://cookpolitical.com/node/11576

* Outside links are not maintained. For broken outside links, CIAO recommends the Way Back Machine.