An Analysis Of The US Debt Ceiling

August 2nd is the last moment for US government debt default.

The right and wrong of the US debt ceiling game

The US debt ceiling is the United States federal debt.

Interpretation of debt ceiling

The US legally determined the debt ceiling began in 1917.

Before that, the US government needed to borrow money from the Congress to report to Congress and implement the plan of raising and financing after obtaining congressional approval and authorization.

This principle is to limit the irresponsible behavior of the next government or overdraft.

During the first World War, in order to deal with the needs of wartime economy, the national finance must have greater flexibility. The US Congress also granted the government a package of borrowing powers. The condition is that the total amount of loans the federal government (excluding local governments) is less than the total amount stipulated in the Congress.

In 1917, Congress established the limited issuance system of national debt in the form of legislation.

The legal basis for the implementation of the system is the second time in the United States.

The federal government's debt mainly includes the following two parts. First, the federal government issues bonds to the public to finance the already existing budget deficit, which is known as the national debt held by the public. The two is the overdraft of the federal government due to the increase of debts by some expenditures.

These expenditures include military spending, social relief, security, medical care and pportation. This is called debt generated by government accounts.

The two part of the total debt is the sum of the federal government debt.

From 1941 to 1945, during the Second World War, the United States

Since 1960, the US debt ceiling has been raised 78 times, almost every eight months on average.

In twenty-first Century, this frequency has accelerated. Since 2001, the debt ceiling has been raised 10 times. Since the outbreak of the financial crisis in 2007 and the end of 2010, it has been six times. Since Obama took office as president, it has increased three times, amounting to nearly three trillion US dollars.

The August 2nd increase was seventy-ninth times.

The rising debt ceiling is a sign of a sustained increase in the US fiscal deficit.

In the short term, the increase in fiscal deficits can stimulate demand and increase output.

In the long run, when the economic recovery is close to full employment, the government's deficit will lead to an increase in interest rates. High interest rates will lead to an increase in financing costs, thereby inhibiting investment, reducing productive investment and productive capital stock, forcing funds to flow from the low profit entity economy to the high income financial investment field.

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Every time the US Treasury bond cap is determined, we need to consider the following factors: GDP growth rate, interest rate and budget deficit level.

The relationship between them is: in the long run, the ratio of national debt to GDP is the key index for determining economic stability, and thus becomes the basis for determining the debt ceiling.

If debt growth exceeds GDP growth, treasury bonds are not sustainable.

The ratio of treasury bonds to GDP depends on the budget deficit, and also on interest rates and GDP growth rates.

Usually, the budget deficit should be equal to or at least not higher than the debt interest payment, so that the annual debt growth equals the financing cost of debt, that is to say, the debt growth rate equals interest rate.

If interest rates are higher than the GDP growth rate, debt growth will exceed GDP growth, and the proportion of Treasury debt to GDP will rise.

On the contrary, interest rate is lower than the growth rate of GDP, and the proportion of national debt to GDP will decrease.

From 1940 to 1970, the US government's budget deficit and debt interest payments were basically flat, but since 80s of last century, especially since the Bush administration, the US budget deficit has far exceeded the debt.

Complex context of economy and Politics

According to the current US Constitution, when the federal debt is approaching the upper limit, the government must reach an upper limit agreement with the Congress.

Therefore, every time raising the debt ceiling is usually accompanied by additional conditions related to the economic politics at that time, the party that occupies the majority of the Congress can put pressure on the government to carry out its political intentions.

And this negotiation has encountered many twists and turns, and indeed it has a more profound background than before.

First of all, the global financial crisis has been clouding, and debt default has "kidnapped" the US and global economy.

Historically, the US government has also had a small default, but it is generally a technical default, rather than a lack of government solvency, and therefore has little impact on the economy and finance.

But this time, the US government has really met the challenge of solvency.

US government debt is the result of a long and persistent fiscal deficit.

In 2010, the US deficit was close to 10% of GDP, and the proportion of government debt to GDP was close to 100%.

In May 2011, when the US debt reached its upper limit, the US Treasury adopted four temporary measures, including the termination of the issuance of state and local government bonds, and the termination of the disability fund.

Second, the two parties are betting on debt default and use the presidential election to threaten the US and global economy.

2012 coincided with the US presidential election. The two parties of the United States both made a bet on debt default and took the US and global economy as hostages, launching a "big game" of political interests.

Traditionally, the Democratic Party of the United States attaches importance to the interests of the civilian class and seeks to establish the "big government" to protect the interests of the civilian class.

From the point of view of fiscal revenue and expenditure, they attach importance to the supply of public goods such as education, medical care and social security, and call for financing the fiscal expenditure through the "robbing the rich and the poor" tax system.

By contrast, the US Republican Party believes in the role of the free market. It believes that the government should abide by the duty of the "night watchman" in the market economy. Excessive tax increases and excessively generous social welfare will dampen the enthusiasm and creativity of the Americans. Therefore, we should reduce the financial expenditure to reduce the size of the government departments.

At present, the Democratic Party controls the US government and the Senate, while the Republican party occupies a majority in the house of Representatives.

This creates a dilemma between the two parties on the issue of federal debt.

In fact, both parties recognize that the current high budget deficit and government debt will not be sustainable in the future, and efforts must be made to reduce the deficit and the size of government debt.

The debate is on how to reduce the deficit.

The bottom line of this administration is to extend the term of borrowing to 2013. The core interest is to ensure a successful re-election. The opposition parties throw out all kinds of harsh conditions and threaten to withdraw from the negotiations, which is only an obstacle to Obama's re-election.

There are three specific game levels: one is the steps to raise the debt ceiling.

As a opposition party, the Republican plan has a principle of slow and phased raising of the ceiling.

The aim of this strategy is to increase public complaints about Democrats over the debt limit.

At the same time, there will be a chance to play with the Democratic Party before the presidential election.

The Obama administration is, of course, strongly opposed to this plan.

The two is to increase revenue and reduce expenditure.

To raise the debt ceiling, the government must promise to reduce its deficit and government debt ratio in the future.

Therefore, we need to "open source" and "throttling" vigorously.

One of the sources of open source is tax increase.

The Obama administration and the Democratic Party support the increase of taxes to the rich, while the rich are the main interests of the Republican Party.

Republicans support cuts in social welfare and defense spending, which is the main source of support for the Obama administration.

The three is the amount of income and expenditure reduction.

Republicans support huge deficits and debts, and Democrats believe excessive cuts will jeopardize them.

Debt crisis: China needs to be cautious

From a long-term and macro perspective, the US dollar's largest international monetary system is collapsing, and the world is ushering in a new world economic pattern. China will get broader development space.

The United States is still experiencing an unprecedented financial crisis. The origin of this financial crisis is the credit crisis of the US bank and non banking financial system. The US government's rescue measures are to support the credit of its financial system with the support of the state, while the national credit of the United States has been overdrawn. In a real world based on credit, the inevitable trend of the US financial crisis is:

At the same time, there are three major factors that continue to happen in the world: one is the long-term weakness and the relative decline of the US economy, so there is no longer enough economic strength to support the international monetary system alone. The economic backbone of the US dollar standard system is being disintegrated.

The two is the integration of European economies. This gradually integrated economic force will be tested by this global financial crisis to support another standard currency, the euro, which has torn the international monetary system of the United States under the unified control of the US dollar, and has also made room for the internationalization of RMB.

The campaign for the internationalization of RMB has started, and its pacesetter is Chinese capital, especially financial capital.

China's capital has gone out of the way, and as the Chinese products go out, the world will find it overnight: China's capital has spread across all corners of the world.

The growth of China's economy will no longer be limited to China's own resources, which will be supported by the resources, markets, technology and talents of the world.

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From a recent and micro point of view, China will suffer from actual losses and still need to deal with it cautiously.

China is the largest creditor of US national debt, and its debt default has three direct impacts on China.

First, direct loss of accounts.

The sovereign demotion of the United States will bring down the price of treasury bonds, and the book value of our country will be damaged. If there is a direct breach of contract, the principal and interest will face unrecoverable risks and the losses will be greater.

Even if indirect default occurs, the purchasing power of China's foreign exchange reserves will shrink dramatically, and the value of conversion to physical assets or other monetary assets will also decline.

Second, real economic risks.

The debt burden of the United States has affected domestic spending, and the economy may fall into recession, which will affect our exports.

Third, the impact of the financial crisis.

The US sovereign debt default could trigger another shake up of the global financial system.

Whether China can overcome another international financial crisis when dealing with the international financial crisis, the economy has not yet been fully stable and the domestic financial risk is increasing, there are also some variables.

In the short term, although there is no best choice, we can do the worst.

When the financial crisis comes, liquidity is king and confidence is king.

Our country can step up publicity efforts to make the international community maintain confidence in China's economic and financial sectors. For example, our financial institutions are guaranteed by the national reputation, and there is no possibility of bankruptcy; in addition, the liquidity of financial institutions.