The August 2 Deadline on National Debt Ceiling

The government has reached its legal borrowing limit on May 16 (Source: CNNMoney July 1, 2011).  Currently, the U.S. debt is over $14 trillion.  This is the sum of all outstanding debt owed by the Federal Government.  Nearly 2/3 is the public debt, which is owed to the people, businesses and foreign governments who bought treasury bills, notes and bonds. The rest is owed by the government to itself.  (Source: www.useconomy.about.com)

Lawmakers and Obama need to reach a deal by August 2 or the United States will face an unprecedented default on its debt.  (Source: Reuters, July 25, 2011)

According to CIA World Factbook, the U.S. debt is the largest in the world.

How did it get so large?  The Reason?

1. Economic Stimulus Package in February 2009

The economic stimulus package was planned to jumpstart the economic growth by saving 900,000 - 2.3 million jobs.  A total of $787 billion fund was allocated for tax cuts, extended unemployment benefits, education fund and healthcare benefits and for job creation using federal contracts, grants and loans.

2. 2008 Government Bailout Measures 

Starting year 2008, the Federal government spent hundreds of billions of dollars in bailout funds to Bear Stearns, Fannie Mae and Freddie Mac, AIG, Citigroup - to name a few, to help them deal with the recession.

3. $800 billion a year defense/security spending 

4. Reduced income from the recession

According to US Department of Labor, the unemployment rate hit 9.2% last June.

Higher unemployment rate results to lower purchasing power.  When less people buy, the retail sector will decline. The same goes for the government revenue from taxes.   

5. Tax Relief Acts

    a. EGTRRA or Economic Growth and Tax Relief Reconciliation Act of 2001 - This act reduced income tax rates for most taxpayers by a few points.

    b. JGTRRA or Jobs and Growth Tax Relief Reconciliation Act of 2003 - This tax relief focused on investment taxes.

(Source: Office of Management and Budget)

The tax relief, although it helped putting more dollars into people's pockets, ultimately hurt the economy by decreasing government revenues and thereby increasing the US debt.

Year after year, the government cut taxes and increased spending.  In the short run, the economy and voters benefited from deficit spending.  Usually, however, holders of the debt want larger interest payments to compensate for what they perceive as an increasing risk that they won't be repaid.  The rise in interest rates will hamper the revival of the US housing industry.

The Implications if National Debt Issue is Not Resolved

If Congress fails to raise the $14.3 trillion debt limit by August 2, the Treasury Secretary, Tim Geithner said that, "This would have a catastrophic economic impact, causing huge harm to the country and the suspension of government services, such as the payment of Social Security funds.  Interest rates would probably rise, increasing government debt while also affecting businesses and homeowners and possibly triggering another recession".  The Americans could face declining dollar, among other problems. As the cost of borrowing rises,   individual mortgages, car loans and student loans could become significantly more expensive.

Officials also warn that, without an increase in the debt limit, the federal government will not be able to pay all its bills next month. Obama recently indicated he could not guarantee Social Security checks would be mailed out on time.