US Debt Ceiling: A Crisis or Political Tool?!

US debt is the accumulated deficits of government spending to revenues across the years. The US debt ceiling originated during the World War 1 (WW1) to maintain a boundary of spending for the US governments during crisis. The debt ceiling is the maximum amount of money the US government could borrow to meets its financial obligations. In order to raise the debt ceiling, the US president is obliged to propose a spending plan and present forecast for upcoming annual budgets to be reviewed by the US Congress then approved. The US Congress has approved raising the debt ceiling 89 times.

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According to the US Treasury, the deficits in FYs 2020 & 2021 alone sum up to 5.9 T USD. The US government incurred 19% of its debt due to the Corona Pandemic & riots in just two years. The deficits in the FYs 2009-2012 account to 5.1 T USD. The US government was indebted in FY2020-2021 more than the four years following the 2008 financial crisis. Nevertheless, the US economy is recovering. The US government did well in the FY2022 to decrease spending & increase revenues. The deficit in FY2022 is less 50% compared to FY2021. But still, the government spent 475B USD FY2022 on net interests. A shocking 8% of the US government spending account to Net interest and the debt is still rising.

The US debt value of 31.46 T USD holds an extraordinary value account to third the global GDP of FY2022 (101 T USD). This debt is held by several entities, 42% of the debt is owned by the government itself. According to the US Treasury government, the US debt holders can be segregated as follows:

Having a Closer look at the foreign debt holders, Japan holds the 1st place at 1.07 T USD followed by China & UK. Most of the foreign debt holders are strong allies to the US government and have defense agreements accompanied with arms deals of good volume. Almost all but for China, China owns around 4% of US debt and third largest trade partner FY2022. The foreign debt is just ~29% of US GDP FY2022 (25.64 T USD). The foreign debt does not pose a great risk currently but will lead to a catastrophe if not handled in this decade.

While both the republican & democratic parties do not want the US economy to crash by the US government defaulting of payments, we have yet to witness an agreement on the next US debt ceiling raise. The US government has already taken measures to finance its obligations from allowable funds but will fall short by the 3rd Quarter of FY2023. The US is witnessing a political battle between a Republican Congress majority and democratic President & Cabinet. The debt ceiling was raised 89 times and it will raised again this year but after negotiations?on the reforms, spending cuts and debt reduction strategies after approval from the Congress. The US debt Ceiling is not a Crisis but definitely a symptom of troubles in the US Economy which will be discussed next week!

References:

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