What is Debt Ceiling and How it Would Affect the World

A hot topic among investors, economists, and stock market experts these days is the looming fight over the debt ceiling in the United States. Many commentators have been discussing this incessantly pointing to the consequences for the world at large. Before launching into the specifics, it is worth discussing what debt ceiling means. Like a household that has to balance its expenses and income every month, the governments around the world have to balance their budgets every year.

Like many people who borrow the shortfall between their income and expenses, governments have to borrow as well if they are running a deficit. Of course, in the case of the United States, the deficit can be financed simply by printing money since the Dollar is the reserve currency of the world meaning that the Federal Reserve can rescue the US Government by buying up the bonds. India, on the other hand, cannot print its way out of its entire debt since it has to pay for the imports in Dollars and not Rupees.

Turning to the debt ceiling, this term denotes the limit to which the US government can borrow. The US Congress and the Senate has to increase the limit every year and the present fight is over high it can be raised. Unless the legislature increases the debt ceiling, the executive cannot borrow and even if the Fed were to buy up the bonds, the limit has to be raised first.

The next aspect here is the fact that even the Fed cannot go on buying up all the debt issued by the US government since that would lead to rampant inflation and an implosion in the debt markets.

Third, the US government cannot go on borrowing indefinitely (which is the case with India as well where the Fiscal deficit is becoming a matter of concern) because that would be like a household that decides to stop paying its debts and continues to borrow which would ultimately lead to anarchy.

The scenarios talked about are very likely and though one might not see the US defaulting on its debt (which some experts are already predicting); the prolonged uncertainty would lead to market turmoil and mayhem in the financial world. Therefore, one can expect some high stakes negotiations over the next couple of months as both the Democrats and the Republicans lock horns.

The implications for the world is that the United States is simply too big to default without taking down the global economy down with it. Hence, no matter what your position and situation are, chances are that you would be affected by this issue as the world economy is too integrated and too interconnected for you to ignore.

Finally, even in the expectation that the debt ceiling is raised, it means that the future generations have to pay the price, as this would be akin to a household passing on their debts to their children.