The debt limit was set in 1917 to allow the US extra borrowing power to aid its entry into World War One, and also set a ceiling to the amount of public debt the country should have. It has been increased several times since.
U.S. Treasury Secretary Timothy Geithner wrote a letter to the Congress urging “to act to increase the statutory debt limit as soon as possible”. He has started a complex juggling act to postpone the date when the government no longer can pay its bills. He says that by using accounting maneuvers and shifting funds around within government accounts, he can stave off a financial crisis for the U.S. government until August 2 at the latest.
But those accounting tricks, such as tapping two federal employees pension funds for loans, would buy only 11 more weeks for the White House and Congress to strike a deal to increase the debt ceiling. After that, Geithner warned, “the U.S. risks a catastrophic default on its debt”.
Until Congress acts, the nation can’t legally borrow more.
If there’s no debt ceiling increase, there’s reason the U.S. couldn’t just keep paying its bond debts but temporarily cut back on other government payments until there’s a debt-ceiling deal — which could mean people not getting Social Security or welfare checks or government employees going without paychecks.
President Obama has warned on Sunday against the national and global implications of the failure to raise the US $14.3 trillion debt ceiling, saying:
“If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOU’s, it could unravel the entire financial system.”
He continued: “We could have a worse recession than we already had, a worse financial crisis than we already had.“
When you read through the news about this issue, it’s quite surprising that you find only discussions whether to increase the debt limit or not, about the measures the Treasury could employ to push back the date on which the current debt limit becomes binding and about spending cuts to reduce the deficit.
Few politicians actually question whether the government can ever repay this debt and who would look under the surface into the deeper fundamentals of the problem.
In the UK the national (government) debt currently stands at roughly £32,800 for every single person in employment. In order for the interest alone to be repaid on this debt every household will pay £1,889 a year. There is no way this debt will ever be repaid unless we fundamentally restructure our economy. Should the government even try to pay back this debt the cuts that it would have to make to public services would mean that millions of people would be thrown into unemployment, and would need to find other jobs.
All these people will require unemployment benefits whilst they look for jobs, and, should they find jobs, they will be paid with money created as debt, should the economy grow (read, indebt itself) enough to facilitate this. As the only end result of allowing banks to continue creating money in this way is another financial crisis, the end result of cutting services and paying back the national debt will only be an even bigger financial crisis, leading to an even bigger national debt.