What is the debt ceiling? It’s a legal cap on the amount of debt the US government can accrue. The US and Denmark are the only democracies that have debt ceilings. The Americans adopted theirs in 1917, so Congress could keep tabs on the president’s spending. It was $11.5 billion then, and is $14.3 trillion today. Congress has raised the ceiling routinely, including 25 times under presidents Ronald Reagan and George W Bush. The debt ceiling has really been unnecessary since 1974, when Congress started passing detailed budgets.

Why has it become the biggest issue in US politics? Republicans blame the Obama administration for the rapid increase in the budget deficit and 9.2 per cent unemployment. It’s an obsession for the right-wing Tea Party, the biggest winner in last November’s mid-term elections. The Republican majority in the House of Representatives came to office on promises of slashing spending and shrinking government. They have transformed the debt ceiling vote into high political drama, with the goal of poisoning Obama’s presidency and preventing his re-election.

Why does it need to be resolved by next Tuesday? August 2nd is the “default deadline”, though some analysts say it can be pushed back to mid-August. If Congress doesn’t raise the debt ceiling by Tuesday, says the Treasury, the US will run out of room to borrow, and will no longer be able to pay all its bills. The government issues 80 million cheques each month, and the Treasury has begun deciding which will not be sent. It’s a tough call, between interest payments to foreign creditors, pensioners, wounded veterans and student recipients of government loans. The treasury secretary, Timothy Geithner, has spoken of “catastrophic economic consequences for citizens”. The US’s credit rating is almost certain to be demoted from AAA to AA if the crisis isn’t sorted out by Tuesday. That will raise the interest rate on US treasury bonds, mortgages and bank loans, at an estimated cost of $100 billion to the US economy. The dispute has dragged on so long that the US may lose its credit rating anyway, especially if the last-minute, patchwork solution does not cut at least $4 trillion from the deficit. More dire predictions include a stock market crash, a return to recession (which is theoretically over) or a global financial crisis on the scale of that provoked by the fall of Lehman Brothers in 2008.

What is most likely to happen? There are at least four plans floating around Capitol Hill that could raise the ceiling by Tuesday, thus temporarily lifting the threat of a US default. Negotiations will be hard and furious all weekend. By pure obstinacy, the Republicans have gained the upper hand, but their leverage is weakened by divisions between moderates and the Tea Party. A compromise is likely to include a trillion or two in spending cuts, a slightly smaller rise in the debt ceiling, and the formation of a bipartisan commission to identify further spending cuts later.

Will this be the end of the problem? No, which scandalises many Americans, who have seen this crisis coming for at least seven months. Politicians still reject two obvious solutions to the ballooning deficit: higher taxes on the rich and on corporations, and lower spending on the entitlement programmes, Social Security and Medicare. Republicans refuse to raise taxes. Democrats refuse to cut entitlements. Until or unless both sides give ground, debt and deficit spending will hobble the US economy.

Courtesy :IRISH TIMES

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