United States debt ceiling crisis

To get into the topic and analyze it deeply lets know about the terms involved in it first. What is debt ceiling and U.S history regarding it? Every year during Budget session United states of America discloses the financials about its plans on Govt spending, expenditures, Tax collections and outlays. The revenue for doing all these activities comes mainly in the form of Taxes from public. If the Treasury does not collect enough in revenue to pay for expenditures by the federal government, it may be authorized by Congress to issue debt (in other words, borrow money) to pay for the federal budget deficit. A limit upto what extent the debt can be taken is decided on the basis of debt paying ability. Raising the debt ceiling directly neither increases nor decreases the budget deficit. U.S has had public debt since its inception. The debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times (to August 2011) under Barack Obama. As of May 2011, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling would allow the federal government to continue to borrow money to support current spending levels. If the debt ceiling is not raised, the federal government would have to cut spending immediately by 40 percent, affecting many daily operations of the government. If the interest payments on the national debt are not made, the United States would be in default, potentially causing catastrophic economic consequences for the U.S. and the wider world as well. So if U.S doesnt raises its debt it will fail to meet its legal obligations which include Paying Social Security Medicare benefits Military salaries Interest on the debt and many other items.

Take a look at how US debt reached its GDP level.

As of August 3, 2011 US debt was : $ 14.3 Trillion. Annual gross domestic product (GDP) to the end of June 2011 was: $15.003 trillion.Thus gross debt at a ratio of 96% of GDP, and debt held by the public at 65% of GDP. There was a tussle occurred in accepting the hike in debt ceiling between Democrats and Republicans. Democrat leader Obama had raised his concerns about raising the debt ceiling to avoid pushing American economy again into recession but Republicans opposed strongly as any Debt ceiling increment should proceed with a strong cut in internal spending. Finally on Aug 2 nd, the House of representatives agreed to raise borrowing limit by $3 trillion with a cut of $ 2.4 Trillion in internal spending.

The two-stage plan calls for $2.4 trillion in savings over the next decade, although the Congressional Budget Office pegs the savings at $2.1 trillion. It also authorizes an increase in the nations borrowing limit through the end of 2012. A special congressional committee to recommend long-term fiscal reforms is also part of the package.

As of May 2011, China Mainland is the major creditor for US treasury securities holding securities of value $ 1.15 trillion, followed by Japan with $ 0.91 trillion and then by UK with $ 0.346 trillion. Indian contributes $ 41 million in terms of securities and stands 16th in the list. Total amount from Treasury securities as of May 2011 : $ 4.514 trillion.

Who is Standard & Poor ?

Standard & Poor's (S&P) is a United Statesbased financial services company. It is a division of the McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices(US-based S&P 500, Australian S&P/ASX 200 and India's S&P CNX Nifty). The company is one of the Big Three credit-rating agencies,
Service and Fitch Ratings. which also includes Moody's Investor

What does its credit ratings mean ? AAA: best-quality borrowers, reliable and stable (many of them sovereign governments)
AA + :high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater

As the risk level increases it gives AA, AA- after that A category will start. A: quality borrowers whose financial stability could be affected by certain economic situations In the same manner the rating continues BBB, BB, B, CCC, CC(highly vulnerable ,speculative bonds),C, CI(past due on interest), R, SD,D & NR.
USA lost its AAA credit rating to AA+. In common language that means now lending money to US is not safe (AAA rating means safe) and little risky. That also means the interest rates will increase slightly making it difficult for the US to

It is the universal truth that if you borrow money, you must pay it back on time. Oftentimes, it becomes necessary to borrow afresh to repay old loans. After its banking system collapsed in 2008, the US had to flush the economy with cash to keep the ship afloat. The US government did this by borrowing several trillion dollars. But even that did not prove enough. The main gainer has been gold. As an outcome of all these developments, the demand for gold has increased. As gold is seen as a safe haven, its price has hit a record high. Effect on India: As the domestic economy is not insulated from the world economy, there will definitely be some tremors here in India. Both imports and exports will be impacted. Indias exports to the US, particularly IT services, will have an adverse impact. Any slowdown in the US will have an impact on India in terms of its ability to export, also Indian exports had declined sharply in the second half of 2008-09 due to a slowdown in the US economy.

At the same time, there may be higher inflows of foreign institutional investor (FII) funds. This will lead to the appreciation of the rupee, which in turn will help bring down the current account deficit. With a reasonably strong financial system in place, India is likely to bear the shocks, as in the 2008 turmoil. India needs more reforms now, but for the next three years, it is stuck with this paralyzed government as it is confronted with the monumental scams.