Any nation needs funds to operationalize its plans and projects. These funds are
generated from various sources such as taxes, licenses, fines, and so on. However, the
financial needs of a nation can exceed the amount of revenue collected making it
difficult for a government to operate. This leaves the government with no choice, but to
seek funds using other means like borrowing. The entire sum of borrowed capital
constitutes a national debt. Although it is one of the largest economies in the world, the
U.S. has a chilling debt of more than $16.7 trillion due to massive borrowing (Hill 18).
According to the report released by the U.S. Department of treasury, these huge figures
indicate that the country has reached its statutory limit giving an indication of a looming
debt crisis and unstable economy.
The US debt ceiling
The debt ceiling (the highest amount of debt the government can take on) in the
US was created with an aim of keeping the president in check with regards to control of
the country’s finances. Thus, this made it easier to control the amount of bonds that are
issued. The mandate is bestowed upon the Congress which has the constitutional
obligation of overseeing all financial issues on behalf of the federal government. It has
been a usual phenomenon of the ceiling by the Congress whenever the United States
risks hitting the limit (Buttsworth 26). For instance, in 2011, the limit was at the $14.3
trillion mark towards the end of July. Hitting the limit means that the US government will
be at risk of not making its interest payments to the bond holders. This will imply that the
federal government will be in a state of default and, therefore, forced to lower its credit
rating. This will eventually raise the cost of its debt.
The current debt crisis of the United States gives any early alert of an impending
shutdown in government operations. The bondholders and workers have become
completely worried about what would become of them when the government hits the
$16.7 limit of its debts. This heightened risk in the financial sector is as a result of the
law that forbids the government from borrowing once it has hit the cap. The government
has many obligations that it will not be able to rely on the incoming revenue and liquid
cash only. The planners are likely to cut government spending an act that will
completely destabilize the economy (Burger 46).
From the forecast, hitting the debt ceiling would mean that ushering in a period of
recession has started. The civil servants are at risk of losing their jobs or suffering
delayed payments. Millions of unemployed Americans are the most affected lot. The
reduction in government expenditure has reduced the social security fund which
provides the unemployment benefits. The financial crisis is expected to worsen even
further as the U.S. debt is normally used as collateral in financial deals by businesses
and individuals (Hill 21). Already, the financial markets are in the fears of the scarcity of
credit as dealers are considering that it is no longer worth holding. Some analysts have
estimated that the cuts in spending and the worsening credit value will lead to the three
million jobs lose over the following subsequent years as of 2013 and, also, increase the
unemployment rate in the United States to nearly 9 percent.
China and the U.S. debt
Like many other foreign governments, the Chinese government in terms of
treasury bills, bonds, and notes. China is the biggest foreign holder of the U.S. debt
owning approximately $1.2 trillion. The China’s ownership of the U.S. debt is much
higher than the ownership of American citizens that hold only about $ 0.9 trillion dollars.
In recent years, the huge investment in bonds in the U.S by the Chinese government
have elicited mixed reactions as critics argue that the behavior of China in relation to the
American bond market is quite significant to an extent that it can control the bond prices
in the U.S. at will. This increases the economic vulnerability of the U.S. to the decisions
of another government (Burger 50).
However, from China’s perspective the bulk buying of the U.S. debt is aimed at
preventing its currency (the yuan) from appreciating. By doing this, the Chinese
government manages to maintain a cheaper yuan so that their exports remain relatively
cheaper to the foreign buyers. Consequently, the Chinese economy would suffer
devastativing effects of not buying the U.S. dollar. Therefore, it is needless to say that
China can utilize its large position in the American bond market to influence the
decisions that it deems threatening to its investment (Buttsworth 29).
From the above discussion, one can note that the U.S. debt ceiling is a potential
deterrent of economic stability as the biggest losers are businesses and households. In
order to salvage the economy from this crisis, the Congress will have to raise the
statutory debt limit. Otherwise, the economy will be on the brink of a possible shutdown.
In addition the U.S. has to ensure the safety of the Chinese investments as they hold
the largest portion of the national debt.
Buttsworth, Matt. The U.S. Debt Crisis. Sydney: McGraw-Hill Publisher, 2011. Print.
Hill, Elias. U.S. National Debt Recovery: A Program Proposal. Bloomington: iUniverse
books, 2013. Print.
Burger, Phillippe. Sustainable Fiscal Policy and the Economic Stability: Theory and
Practice. Massachusetts: Edward Elgar Publishing Ltd, 2003. Print.