U.S. of A : Debt Ceiling

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asingh

asingh

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Well, been hearing a lot about the US debt crisis as the nation reaches the ceiling. Could some gurus here throw greater insight exactly what are the ramifications due to this breach. Some questions which I have (consider me ultra-noob here):

1. How has this debt been accumulated.

2. Where has US borrowed all this money from.

3. Is it money which the nations people/government owe to each other and is classified as 'debt'. Example CC/loans.

4. Where have all these funds been utilized.

5. Can it trigger another domino affect.

Some links which I tried to read, but still could not comprehend.

United States public debt - Wikipedia, the free encyclopedia

US edges closer to default as debt talks collapse - The Times of India

And a mind-boggling ticker clock.

U.S. National Debt Clock : Real Time

Appreciate the views here.
 
Hehe the political game being played in USA. The ceiling will eventually be lifted, but Obama is banking on a lot of provisions to be made, before he pulls out the knife.

A nice explanation is provided here:

The Debt Ceiling, Explained : Planet Money : NPR

1. Debt is largely accumulated if the federal government spends more then what was budgeted.

2. US generally over the years kept increasing the borrowing ceiling, and to honor current payments took further debt. The debt is usually in form of US government bills (10 year Treasury bonds in USD), loads of which is funded by the Chinese government ($1.5 trillion at last count).

3. Yes it is debt which US government owes to counter-parties. But its like a huge ponzi scheme, as US currently cannot even service the interest on the debt with internal revenues. So in short to repay any maturing debt, it borrows more money. The only other option is to default on sovereign obligations, but this will lead to a catastrophe as almost all of US debt is funded by other countries through US notes. So in short if US defaults a lot of countries will see its treasury being emptied, the Chinese in particularly would be very pissed.

4. These funds have been utilized internally in the US. Largely to repay any maturing debt, social service payments, tax cuts deficits given to US citizens etc.

5. What Domino effect, if US defaults half the world will go bankrupt and there will be an anarchy like situation in most developed nations on the planet.

Whether you like it or not, US is the overlord of the world, and to save your a**, you have to slog it out so that a US citizen can live his/her American dream :P
 
The debt has been piling up because when you take a loan and the interest you have to pay is very high , For that you take more loan . US will have serious problems cutting this debt off ! Since the Federal Govt budget is low and there expenditure is usually high I dont see this debt coming down soon .

You ask the question about where has been this funds utilized , Not even the Govt can answer that !

The main point is that the US can not afford to default as it will put lot of countries at risk and We are one of them .
 
^^

Thanks for that article Aces. You answered the questions well..! :)

Just googled a bit more, and got another decent read.

Why have they let it run so large. Approximating 95-97% of the GDP. Whooa..what were they thinking.

Further more, some Q&A details are given here.

--- Updated Post - Automerged ---
xtremevicky said:
The debt has been piling up because when you take a loan and the interest you have to pay is very high , For that you take more loan . US will have serious problems cutting this debt off ! Since the Federal Govt budget is low and there expenditure is usually high I dont see this debt coming down soon .

You ask the question about where has been this funds utilized , Not even the Govt can answer that !

The main point is that the US can not afford to default as it will put lot of countries at risk and We are one of them .
Click to expand...

Apparently most I could glean, was that it went into SS payments, Medicare maintenance, and defense. Probably all the wars too.

and...tax cuts.
 
Aces170 said:
3. Yes it is debt which US government owes to counter-parties. But its like a huge ponzi scheme, as US currently cannot even service the interest on the debt with internal revenues. So in short to repay any maturing debt, it borrows more money. The only other option is to default on sovereign obligations, but this will lead to a catastrophe as almost all of US debt is funded by other countries through US notes. So in short if US defaults a lot of countries will see its treasury being emptied, the Chinese in particularly would be very pissed.
Click to expand...
The bolded bit is bunk, recall seeing a document earlier that said only 14% of US debt is owned by foreigners.

treasury being emptied, heh more bunk.

Also lose the dramatic words like 'catastrophe' its useless hype. Greek & Ireland have already defaulted, there is no catasrophe for them is there. Things get harder thats about it.

China as well as Japan will be upset because their investments will lose their value.

Aces170 said:
5. What Domino effect, if US defaults half the world will go bankrupt and there will be an anarchy like situation in most developed nations on the planet.
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Again more useless hype. Anarchy prevails when food prices rise beyond expectations and remain there for long. US defaulting has got nothing to do with that.

Be very skeptical whenever you see/read dramatic language being used in this context. Newspapers & anchors use it to attact attention.

Aces170 said:
Whether you like it or not, US is the overlord of the world, and to save your a**, you have to slog it out so that a US citizen can live his/her American dream :P
Click to expand...
Try telling that to somebody that does not work in the export segment ;)

If the US defaults the interest rate on their interest payments rises about 1%. ONE PERCENT , got that. Thats what Larry Summers said a cpl of weeks ago on Fareed's GPS show.

The bigger problem for the US is the knock on effect this will create in their economy, the added uncertainty. Its not good for Americans.

Sorry, but cannot add anything more for the OP, as i fully expect them NOT to default and make the compromises necessary even at the 11th hour.
 
Also lose the dramatic words like 'catastrophe' its useless hype. Greek & Ireland have already defaulted, there is no catasrophe for them is there. Things get harder thats about it.

China as well as Japan will be upset because their investments will lose their value.
Click to expand...

Greek and Ireland are not the economies which drive world growth, US has a large hand in it.

Upset is rather a timid word, US defaulting will result in huge chain reactions. Almost all the large banks in the world will have their capital ratios eroded, dollar currency will lose its supremacy (as the currency is pegged to the sovereign's performance). Any small loss of trust in USD results in oil prices and gold prices surging, oil price surge will result in a spiraling inflation in countless countries, a lot of under-developed nations will need to cut back on energy generation, which will have its own set of complications.

The bolded bit is bunk, recall seeing a document earlier that said only 14% of US debt is owned by foreigners.
Click to expand...

Certainly more than that:

America's Foreign-Owned National Debt - Forbes.com

Again more useless hype. Anarchy prevails when food prices rise beyond expectations and remain there for long. US defaulting has got nothing to do with that.
Click to expand...

Explained above, why there would be a spiraling food inflation.

Sorry, but cannot add anything more for the OP, as i fully expect them NOT to default and make the compromises necessary even at the 11th hour.
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No one expects them to default, its a political game to agree upon budget cuts. And yeah whoever believes taking more debt to repay existing debt is not a death trap is smoking some exotic weed. The question is when do they take budget cuts.

Try telling that to somebody that does not work in the export segment
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Its a statement aimed at all, bro domestic demand cannot be impervious to a spike in energy/commodity prices.
 
Can anyone explain what the outcome of this would be on a country's foreign reserves (which is held mainly in USD)?
 
Aces170 said:
Greek and Ireland are not the economies which drive world growth, US has a large hand in it.
Upset is rather a timid word, US defaulting will result in huge chain reactions. Almost all the large banks in the world will have their capital ratios eroded, dollar currency will lose its supremacy (as the currency is pegged to the sovereign's performance). Any small loss of trust in USD results in oil prices and gold prices surging, oil price surge will result in a spiraling inflation in countless countries, a lot of under-developed nations will need to cut back on energy generation, which will have its own set of complications.
Click to expand...
Sept 2008 ?

We've already seen what effects that had, this isn't going to be worse, it could very well be less.

Aces170 said:
Certainly more than that:
America's Foreign-Owned National Debt - Forbes.com
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At the end of last year foreigners owned close to half of the publicly held national debt.
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Then we see a total figure of $3.6 trillion.
US public debt is ~14 trillion that means 25% so more than 14% but no where close to half.

The figures i saw were GAO numbers about a yr back. Thats how the US govt saw it at the time.

Aces170 said:
Explained above, why there would be a spiraling food inflation.
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The last bout of food inflation had more to do with droughts that affected wheat production in Russia.

Aces170 said:
No one expects them to default, its a political game to agree upon budget cuts. And yeah whoever believes taking more debt to repay existing debt is not a death trap is smoking some exotic weed. The question is when do they take budget cuts.
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Right, so all the colourful language will not come to pass will it ?

This is why i did not bother to waste any more time on unlikely hypotheticals.

Aces170 said:
Its a statement aimed at all, bro domestic demand cannot be impervious to a spike in energy/commodity prices.
Click to expand...
The biggest differrence i noticed after the bailouts in 2008, was real estate took a hit. services companies would have been affected with cancelled or reduced orders. Other than that nothing much.

Loads of pundits were going on about how we were not very affected by the recession in the US whilst blissfully ignoring we did not have that much financial exposure to foreign financial markets to begin with thanks to the RBI.

Oh and those thinking US debt is very high almost as much as their GDP, i saw a report in the nytimes last month that said India's debt was at 80% if her GDP. We ain't very far behind folks :(
 
blr_p said:
Oh and those thinking US debt is very high almost as much as their GDP, i saw a report in the nytimes last month that said India's debt was at 80% if her GDP. We ain't very far behind folks :(
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That's nothing, UK's debt is ~300% of their GDP!

BTW wasnt India's debt closer to ~300-400 billion? IINM our GDP is around 1.4 trillion so how is our debt 80% of our GDP?

EDIT: If the figures given here are true, than India's debt-to-GDP percentage is 15% and that of UK's is 400%
 
^^ Dont think external debt is a correct indicator. Large British banks with deposit base outside UK will contribute to that figure too. Current a/c deficit would give a more accurate picture.

Sept 2008 ?

We've already seen what effects that had, this isn't going to be worse, it could very well be less.
Click to expand...

Well the only big difference is Sep 2008 had a bailout by the US government. Who is gonna bail the US government? In the unlikely event of a default happening, it will be much more severe. Capitalism as we know it, will either cease to exist or would have been seriously altered.

Right, so all the colourful language will not come to pass will it ?

This is why i did not bother to waste any more time on unlikely hypotheticals.
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They playing so close to the due date is a concern enough, and instances of the ceiling being increased has accelerated in the last 10 years. Of course them brushing the issue under the carpet for a future implosion is also an issue. Someone has to repay the debt sometime or take a loss somewhere, neither of which is happening atm.
 
Aces did have they started QE3(printing of further dollars) ?

US can easily repay its debt with the QE going but that will ultimately hit dollar rates badly down which the chinese wont like as it will erode their savings.

But US have no option but to continue QE as it will keep on delaying the default and wait for its citizen to again go on buying spree just like before 2008 recession.
 
^^

But I thought, even the government cannot just press off more paper and raise the count. They always re-pay back the Federal Reserve with Treasury Issued bonds for the amount generated. Which leads to further debt.
 
^^

Guess they have been doing that all these years. :)

People are suggesting less welfare and higher taxes. Would that work, or is it just a drop in the bucket..?
 
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