The government needs money fast. The problem is that the bank vaults are closed for the time being, and unless they are opened by early March, America could face a cash crunch.
The intense battle between Congress and President Barack Obama, who is requesting an immediate increase to the current national debt limit of $16.4 trillion, is ongoing, but it needs to be resolved soon, as the current national debt subject to the limit is $16.39 trillion. Obama is threatening possible delays to Social Security and veterans’ benefits, along with an impact on the government payroll, if the cash doesn’t come. (Source: Lee, C.E., and Hook, J., “Obama Escalates Debt Fight,” Wall Street Journal,January 14, 2013.)
Failure to raise the national debt limit would mean the government accessing emergency funds to avoid a potential default.
The issue is that the Republicans in Congress want to see more budget cuts and cost control before they look at raising the national debt limit. Rating agency Fitch has warned that if the debt limit is not increased in a “timely” manner, America’s debt rating could be downgraded. In the article, Fitch said the use of the debt ceiling was “an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.” (Source: Ahmed, S., “Fitch Warns of US Downgrade Over Debt Fight,” CNBC, January 15, 2013.)
Moody’s Investors Service has already warned it may cut America’s triple-A debt rating this year (for the second time) should the government not deal with the financial crisis and reduce the national debt-to-GDP ratio. A rating cut would translate into higher yields required for the U.S. Treasury to compensate for the higher risk.
The Congressional Budget Office (CBO) predicts the U.S. economy could contract by 0.5% in 2013 if fiscal spending is curtailed. (Source: Congressional Budget Office web site, last accessed January 16, 2013.)
Again, the problem is that a cut in fiscal spending at this stage, given the fragile economic recovery, is a major risk for the country that could drive America into another recession. On the other hand, if cuts aren’t made and costs aren’t curtailed, the country’s national debt will continue to spiral out of control and will be given to another generation to deal with.
The reality is that the national debt is accelerating fast, and it’s not going away anytime soon. The only plus here is the country’s low bond yields; albeit, a rating cut will not help. If the U.S. had to pay out similar high yields as Spain or Italy, the U.S. would be broke.
This national debt will take decades to pay off, let alone to get to a more manageable level. But viable plans must be put in place now or our kids and their kids will suffer more.
Something drastic needs to be done regarding the national debt, or the country’s financial strength will go down the toilet!
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