US President Joe Biden signs the debt ceiling bill. Good for the World. One economic headache less. But Is it sustainable in the long run? Lets see
Before we being, lets understand what debt ceiling is with an ELI5 explanation:
Imagine you have a credit card with a limit of $10,000. You've already spent $9,000, and you need to buy something that costs $2,000. You can't charge the $2,000 purchase to your credit card because you've already reached your limit. You need to either pay off some of your existing debt or ask your credit card company to raise your limit.
The United States government is in the same situation. The government has already borrowed $30 trillion, and it needs to borrow more money to pay its bills. But the government can't borrow more money unless Congress raises the debt ceiling.
If Congress didn't raise the debt ceiling, the government would have defaulted on its debt. This means that the government would not have been be able to pay its bills,
The debt ceiling is a complex issue, but it's important to understand the potential consequences of a default. If Congress didn't raise the debt ceiling (of course, they would as they had done it in past), it would have had a devastating impact on the US economy and the global economy.
Yes, this is now averted, AS OF NOW! How long can the US go on? The USA is world's largest debtor. Its debt to GDP ratio is at a whooping 120% ( i.e the USA has a debt 1.2 times of its revenue per year. In other words, the USA needs 1.2 years to repay its debt, if it fully spends its GDP to settle the debt)
To emphasize it better, below chart shows the Debt/GDP ratio of USA and India since 1991 - 2022. The Debt/GDP ratio of USA has doubled from its 2008 financial crisis levels.
Note: Comparing Debt/GDP of India vs USA is not an apples to apples comparison, for a fact that one is a developing nation and other one is a developed one. However, this can be used to gauge how the USA has gone on to increase its debt recklessly for the last 15 years.
In his book "Naked economics", Charles Wheelan says,
"The United States gets loans from China to buy its exports. In the long run, the situation poses serious risks for both parties. The United States has become a large debtor nation. Debtors are always vulnerable to the whims and demands of their creditors. America has a borrowing habit; China feeds it. James Fallows has noted, “Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.”13 Worse, China could threaten to dump its huge hoard of dollar-denominated assets. That would be a ruinous thing to do. As Fallows points out, “Their years of national savings are held in the same dollars that would be ruined; in a panic, they’d get only a small share out before the value fell.” Still, that’s an awfully powerful weapon to give a nation with which we often disagree. The Chinese have it worse. Suppose America’s debt burden grows beyond what U.S. taxpayers can (or are willing) to pay back. The U.S. government could default—simply refuse to honor its debts. That is highly unlikely, mostly because there is another irresponsible option that is more subtle: America can “inflate away” much of its debt to China (and other creditors) by printing money. If we recklessly print dollars, the currency will lose value—and so will our dollar-denominated debts. If inflation climbs to 20 percent, then the real value of what we have to pay back will fall by 20 percent. If inflation is 50 percent, then half of our debt to China effectively goes away. Is this a likely outcome? No. But if someone owed me a trillion dollars and also had the authority to print those dollars, I would spend a lot of time worrying about inflation. This dysfunctional economic relationship will end. The crucial questions are when, why, and how.
Can America get its fiscal house back in order? The United States is the world’s largest debtor. We owe Chinese bondholders more than a trillion dollars. We’ve had to borrow heavily to pay our bills for the past decade. The sobering part is that some of our most significant government expenses lie ahead as the Baby Boomers retire and begin to claim Social Security and Medicare. The “peace dividend” at the end of the Cold War lasted about 45 minutes, so we seem stuck with large defense budgets for the foreseeable future. The financial crisis imposed a large fiscal cost; tax revenues fell at the same time the government was spending more. When the economy recovered, it was a good time to get the finances back in order—except that we passed a large tax cut instead, adding about a trillion dollars to America’s already substantial national debt. Math is math; every reasonable calculation I’ve seen shows that our fiscal trajectory is unsustainable. So what will we do about it? U.S. society has developed not merely an aversion to higher taxes, but a palpable hostility. That would be fine if we were willing to trim government to a size that we could fund. But we haven’t done that either. Think about what that means. Going forward, somehow we have to raise enough revenue to (1) pay for whatever government we choose to have, which we aren’t doing fully now; (2) pay the interest we’ve accumulated on past bills; and (3) pay for the new expenses associated with an aging population and expensive entitlement promises. That’s going to require serious political leadership and recognition by Americans that the status quo is not an option. Simon Johnson, who had plenty of experience with financial crises as the former chief economist for the International Monetary Fund, has noted, “Overborrowing always ends badly, whether for an individual, a company, or a country.”
To summarize what Wheelan says,
China is USA's largest creditor. China could make USA dance to its tunes. Or worse still, there could be economic downturns in both USA and China if the US continues to pile up its debt
Their dysfunctional economic relationship will end. The question is When, Where and How.
Going forward, somehow US has to raise its revenue. That’s going to require serious political leadership and recognition by Americans that the status quo is not an option
Overborrowing always ends badly, whether for an individual, a company, or a country.
Hmm, someone has to pull in the reins of the American Debt horse before it runs amok and damages the entire world.
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