Quote:
Originally Posted by giver99
A legislated debt ceiling is a bit ridiculous. With the USA's political system it seems like this is the only mechanism by which they will come to terms with debt and deficits.
The argument is not about debt being good or bad, its about too much debt. Families with too much debt will not be able to service it and they will go bankrupt. Same with countries and corporations (excluding bailouts which are a whole other thing...)
If it wasn't legislated, the market will dictate this ceiling. This is what is happening in the USA right now. Rating agencies are imposing their own debt ceiling by threatening a downgrade if deficits are not reduced. The threat of a downgrade is forcing the debt ceiling hike legislation to include deficit reduction measures.
A couple of posts on Zerohedge today illustrate these points. The first one on consequences of a downgrade:
http://www.zerohedge.com/news/nomura...quidity-freeze
The USA's debt to tax receipt ratio:
http://www.zerohedge.com/news/time-d...ally-different
|
Yes, it is a question of total debt rather than just good or bad debt and that in the long run, deficit/debt need to be addressed and I agree the market will be the final arbiter of any downgrade.
The second link is less predictive of any potential downgrade since tax receipts have fallen from a combination of reduced economic activity during a near economic catastrophe and from self imposed income reduction via tax cuts when expeditures increased concurrently wth the tax cuts ie. Bush tax cuts versus 2 wars, medicare part d etc. In other words, increasing govt revenue is as simple as legislating it given the political will to do so just as there was the will to cut taxes in the early 2000s.
Any analysis of the debt crisis that focuses strictly on budget deficits and/or debt side of the ledger alone to the exclusion of the income and net worth side of the balance sheet really doesn't give the entire picture.
GDP (or income) of the US economy is ~14 trillion dollars with an aggregate networth of 50/60 trillion in assets.
1.5 trillion deficit and a 14 trillion debt is a big scary number but in comparsion to the income and wealth of the US and relative to the 16 trillion dollar debt (in 2011 dollars) incurred during the 1940's and early 1950's, it is historically manageable but not sustainable long term.
The US has a long way to hitting the market's wall from metrics like having a lower debt to GDP ratio compared to Greece or other sea change events like WWII, to its reserved currency status and "flight to safety" cache which no currency is even close to becoming whether it is the Euro or renmbi.
It is going to be an interesting August.
Here is OMB spreadsheet on the debt to GDP ratio:
http://www.whitehouse.gov/sites/defa...s/hist07z1.xls)