Does Debt matter
Most of the borrowed funds come from the foreign investors. Much of these have been used in the past two decades to help finance two long wars. They were also used salvage its financial system from degrading which could lead to destabilization of the economy. It was also used to promote economic growth through economic stimulus. The statue has always restricted the country’s capability to borrow funds. The government must be able to give new debt as long as it stays to run a budget deficitto finance their projects. The debt limit, or ceiling, arrays the maximum extent of which the outstanding federal debt the U. S. government can sustain by law. For example, in January 2012 this number stood at 16.
This leads to the requirement of the approval of Congress for any lowering or raising the limit from this legislative level. In this case, the treasury department can only pay bills as it acquires tax revenues. Once the revenue is not enough, the secretary of the treasury has to choose between paying the salaries of employees, their social benefits or the interest accumulated on the national debt. The debt limit of the nation is similar to the limit that the credit companies place on the expenditure of its clients. The Congress has the authority to levy the debt ceiling on the limit of the legal debt. The debt ceiling has therefore been raised if the country comes close to hitting its limit.
This implies that the debt ceiling has a potential impact on the debt ratings of the U. S. and the economy at large. And Congress has increased the cap more than seventy times since 1962; some analysts resist that by requiring congressional consent. The government will also not be able to devote in the most critical investments like schools, healthcare, and infrastructure due to the diversion of the taxpayer money to other uses. When the federal debt ceiling is not raised several days before the treasury exhaustion of the extraordinary procedures and cash reserves, there will be a likelihood of a downgrade. The downgrade is as a result of the expected official assessment of the U. S. sovereign ratings hence a negative picture on the Country’s triple-A rating.
The prowess of the foreign savings is determined by the economic conditions. It is shown that investments in the US yields higher returns compared to those in other progressive economies. The dollar has been stable for over twenty-five years in comparison to the currencies of Japan and European countries. Britain managed to deal with its public debt in a more defined and concise manner. Critics aver that the case of Britain is an epitome of good debt management strategy. Impact on the Consumer Confidence From the economic theory, lower stock prices and widespread of risks hurt the system of private spending. The debt ceiling standoffleads to the disruptions in the financial markets. This can cause a reduction in the consumer confidence.
Such a deadlock can also weaken the economic expansion. For instance, the consumer confidence in the U. Thisindicates that lower cost of resources and comparatively higher borrowing costs would weigh on the private system of spending. Many times businesses and households are reluctant to spend mainly due to uncertainty on the price of the resources and economic activities. Also, uncertainty in the borrowing cost or interest also affects both business and household spending. For example, in August 2011 the stock market in the U. S became unstable but recovered months later. Such funds exclude the social security fund and the Medicare funds. This implies that if the treasury fails on its interest payments, three possibilities will happen. In the first place, the federal government would be unable to make the monthly payments.
The employees within the public sector would be furloughed, while pension schemes would not function. The beneficiaries of the Social Security fund, the Medicare, and Medicaid payments would not receive their payments. In game theoretic terms, a confidence crisis can occur even along an otherwise sustainable path if the market for debt has multiple equilibria. Maturing within one year are $2. 58 trillion in nominal debt, which includes $1. 51 trillion Treasury bills. Also due within a year are $201b nominal coupon payments, plus $40b principal and interest on inflation-indexed bonds, adding up to a debt service requirement of $2. The good scenario is an equilibrium if government satisfies its intertemporal budget constraint and does not intend to default when financing is available. In the crisis zone, there is also a “bad” equilibrium, where the default is unavoidable without access to refinancing especially a “run” on sovereign debt.
If investors expect a default and refuse to refinance, their expectations will be confirmed. One could speculate about the aftermath of default to say, ask if a refusal to refinance is rational if a suspension of payments were followed by sufficient payoffs later. But experience suggests that fears of illiquidity per se are destructive. The rationality of a speculative attack depends on how the Federal Reserve and the Treasury would handle a failed Treasury auction which may lead to lack of buyers. One contingency plan might be a shift to selling long-term inflation-indexed securities to avoid or quickly reverse monetization. Inflation-indexed bonds are in effect senior to nominal debt if a refinancing cutoff is expected to trigger monetization and not default.
A maturity structure that distributes real debt service uniformly over a long horizon would largely remove the necessity of future refinancing. Hence long-term inflation-indexed bonds should be marketable even in a confidence crisis. Thiswill ensure that the goodequilibrium continues to be the focal point for coordinating investor expectations. But investor confidence should not be taken for granted. All significantrating agencies have recently started to question the U. S. government’s credit rating, which is a disturbing sign. Moreover, state debts are mostly long-term and linked to capital projects. There is no need to refinance and hence no run risk. 17 While Europe has long strived to limit debt-GDP ratios, debt structure and refinancing issues received much less attention—until the Greek crisis.
The apparent contagion after that suggests that access to refinancing is now a central issue. The challenge for Europe is to eliminate the run equilibrium. The budget cut will involve reducing the number of air forces staff, decreased army manning both civilian and military personnel, the decrease of the naval power and destruction of submarine aircraft. Although these cuts of the defense budget will reduce the debt level, there will be a weaker and inferior national security. Also, there will be decreasing capabilities in responding to the concerns related to national security. When the U. S. Raising the debt ceiling does not give authority to the government to spend more beyond what the Congress has approved. In this case, it aids the government in meeting the existing obligations to the people, to the country's vendors and the investors at large.
This is the reason why the Treasury employs extraordinary measures meant to save cash. In applying the cash-saving tools, the treasury suppresses the level of intergovernmental debt such as the Treasury securities that are held by other government agencies. Suppressing this level of spending also allows for the treasury to create space for the public debt. The other economic impact of the debt ceiling is volatility of the stock market. In fact, the usual degree of uncertainty in the financial marketplaces is instability, a measure of the normal charges that VIX provides. During the debt ceiling of 2011, the measure doubled and remained high for some time. Greater levels ofinstability can make investors to withdraw from the precarious businesses. Such development could see an increase in the levels of the costs of borrowing in businesses and household.
Which can lead to an increase in the corporate risks a down push in the treasury yields? Source: draw form Credit Suisse Derivatives Strategy The adversative outcome on business has also been hushed as a result of the slowdown in the rise of the total cost of borrowing, relative to the wider spread of the risks. The treasury yields are projected to rise this year, while the corporate spreads are mostly applicable to the system of borrowing costs for large institutions. There are also similar corporate credit risks that may lead to the widening of the mortgage, while for the treasury yields, such mortgage spreads may increase the cost of purchasing a home for the citizens. The increased rates may also indicate that refunding may not advance the levels of cash flow.
Such situation may restrain the rates of consumption leading to a reduction in the level of spending. Andmaintain economic superiority over its rivals. This advantage allows a country tooutpace its adversaries in equally economic antagonism and international matters. Witheconomic dominance lies the potential for a nation to mostly and ambitiously deviceits instruments of national power in support of its economic and national security objectives. Without this gain, a nation will ultimately be obliged to limit itsendeavors. This will result in a platform for opportunity for a competitor to exploit either economically or strategicallyto seek abenefit. This will increase interest rates and taxes and decreasedeconomic growth. The inevitable budget cuts will reduce spending on nationalsecurity-related expenditures. This leads to decreased soft power capabilities, a reduced capacityto respond to national security concerns.
This will also lead to a reduction in U. S. China keeps buying treasuries from the U. S. to keep their currency lower to the dollar. If the debt market becomes untrustworthy, the foreign creditors are forced to withdraw vast portions of their shares. Hence other investors get induced to do so. Treasury will as well raise the interest rates slowing the America’s economy. Since there is a connection between dollar's value and Treasury securities, there will be consequent downward pressure on the dollar. The decline of dollar decreases demands given that there is a compensation of foreign holders in worthless currencies. The effects of the federal debt ceiling on the dollar can unquestionably result in debt crisis when it reaches a point where the government can borrow no more funds from other countries.
This happens if the Congress did not succeed in raising the debt limit. In the short-run, G-7 countries growth performance is not affected by debt structure, but in the long run, it affects economic growth due to crowding out effect. Ugo et al. (2012) used panel time series econometric techniques toconducta study on public debt and economic growth in advanced economies. And found out that a high level of debt establishes alter investor perspective of the economy which would push the country towards a bad equilibrium. Ferreira (2009) used Granger casualty analysis to study 20 OECD countries to determine the nexus between economic growth and public debt. Therefore, this paper seeks to delve deeper into the study and fill this research gap. Discussion and Analysis Economic Impacts When the Debt Ceiling is lowered Lowering of the debt ceiling will negatively affect the U.
S. economy. The effects will range from a sharp economic decline to a long time depression. The result of this will be a devaluation of the U. S. dollar as compared to the other countries thus making it hard for the U. S. government and everyone else to purchase homes, take loans or even to arouse the financial system. economy. For instance, a higher debt ceiling enables the Treasury to keep borrowing money that the government can use to make its payments that are approved by the Congress. Therefore, it will be easier for the treasury to pay the national bills such as social security and Medicare among others. Those who are employed by the government will get paid due to the financial stability.
Raising the debt ceiling has positive impacts on the stock market or other business that relies on the government. S. citizens since when the country has money, the economy will be stable. The homebuyers or other small businesses in the state will undoubtedly have the advantage due to the consistency of financial flow. And also, the government will be in a position to finance those activities that entirely depend on it. There will be reduced taxation, and the interest rate will be low making the products sold by these companies to be consumer friendly. It was chosen due to changes in an economic trend which had direct implications on the macroeconomic variables in the USA. It used annual data because they are readily available from federal government sources.
The study used SAS system to aid in data analysis. Descriptive analysis was deployed to analyze the data. Data analysis is the process of transforming, gathering and modeling data with the objective of taking useful information, suggesting applicable conclusions and decision-making support. 03% in 1947. Increasing t bill rate is caused by increased demand for government financing through capital markets. The government is forced to compete for funds with private sector firms, therefore, has to increase the returns, in order, to attract investors. The average GDP/Pop was 21045; highest was 60828. 92 and lowest was 1806. 7% of the plots fit along the line of regression,but since the variables were more than one, adjusted R squared provides a better picture of the overall fit. It shows that of the plots fit along the regression line.
This implies that only 59. 99% of the changes in the response variable are explained by changes in the predictor variables. The significance F value obtained from the Analysis of Variance (ANOVA) is lower than the required significance level of 5% which shows that the model was suitable in explaining the relationship between the variables under study. 12563 and -0. 0126 for every increase in Initial Debt / GDP and Change debt/GDP respectively. All the β values disapprove the null hypothesis that β=0(there is no linear relationship between the dependent and independent variable. ) Y= b0+ x1b1+x2b2+x3b3+e Y= 0. 325E-07x1+ (-0. Germany t bill rate has been increasing at a moderate level due to its sustainable fiscal structure which is supported by formidable export markets for its services and machinery.
The average GDP/Pop was 34992; highest was 47819. 42 and lowest was 23491. It was determined that t bill rate had a weak positive correlation (0. 0362) with debt/GDP, but a weak negative relationship (-0. 26, b1=4. 0426E-06, b2= -18. 5449, b3=6. For every unit increase in GDP/POP, t bill increases by 4. 0426E-06; decreases by-18. China borrowing is average due to its complex economic approach compared to the USA. The average GDP/Pop was 2805. 34; highest was 358. 82 and lowest was 8166. It was determined that t bill rate had a weak positive correlation (0. B0=10. 69, b1=0. 000723, b2= -36. 21, b3=-4. For every unit increase in GDP/POP, t bill increases by 0. There are also symptoms that show that the current debate on the debt ceiling has affected the financial markets.
The price moves may be small, even though the yields on the treasury bills that mature in due course will be higher as compared to those that mature immediately. Once the market participants misplace assurance in the US's readiness to pay arrears, then the adversative impacts of the debt ceiling that was evident in 2011 would resurface. The increase in Treasury incomes could similarly lead to the heightened charges when it comes to financing the government debt, which would, in turn, worsen its fiscal position. If the debt ceiling could probably lead to default, then it would affect the financial markets, as well as, customer expenditure and the general economic development. https://repository. up. ac. za/bitstream/handle/2263/56143/Aye_Does_2016. pdf?sequence=1&isAllowed=y.
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