Arshad Shaikh examines how the possible failure to raise the debt ceiling in the United States may lead to a global economic and financial catastrophe. The American national debt has become unsustainable, and there is a standoff between the White House and Congress over the conditions to be imposed before Congress approves an increment in the debt ceiling. While the world can do little except watch the unfolding drama, the stalemate is a lesson for nations on how not to live beyond their means. Living on borrowed money cannot go on till eternity.
The American government could go broke if their Parliament (Congress) does not raise the debt ceiling (upper limit of how much the White House is allowed to borrow). If the American administration runs out of money then the financial and economic impact for the US and the world could be disastrous.
Congress (which is now in control of the Opposition i.e. the Republican Party) does not approve of raising the debt ceiling without sweeping budget cuts. The Biden team is not ready to accept those cuts and wants “no strings attached” to the debt ceiling deal. But, how did America build up so much debt? What are the implications if the debt ceiling negotiations end in a deadlock? What are the lessons to be drawn? As Theodore Munger said, “Debt is the secret foe of thrift, as vice and idleness are its open foes. The debt-habit is the twin brother of poverty.”
THE US NATIONAL DEBT
If you visit the website pgpf.org, you will see numerals changing at an incredible speed. It shows the US National Debt (at the time of writing) as $31,461,220,999,999. That number stands for a phenomenal $31 trillion and the debt per American citizen stood at $94,184. The National Debt as a percentage of GDP can be seen in the below table.
| US National Debt as % of its GDP | 1960 | 1970 | 1980 | 1990 | 2000 | 2010 | 2020 | 2021 | 2022 | 2023 |
| 44% | 27% | 26% | 41% | 34% | 61% | 100% | 98% | 97% | 98% |
The US National Debt is the amount that the US government owes to its creditors. Technically, the debt as a percentage of GDP is more important than the debt as it reflects the ability to pay off the accumulated borrowing. In other words, as long as the person’s salary is large enough to service his debts, the amount of liability is of secondary importance. Why is the National Debt so large? The simple answer is the mismatch between revenues and spending.
The main drivers behind such a huge accumulation of debt are an aging baby-boomers population along with its associated healthcare costs, and a tax system that cannot bring in the revenues required to sustain growing expenses.
The federal debt remained steady in the 1970s but rose dramatically in the 1980s and 1990s under Reagan and Bush. The Clinton era saw a slight reduction before it again started increasing under George Bush culminating in the financial crisis of 2008. The Bush Presidency tax cuts, wars in Iraq and Afghanistan saw the debt bloat immensely under the eight years of the Obama administration. Finally, the Covid 19 was the straw that broke the camel’s back and the Americans now stare at a national debt that is causing a government shutdown.
A REPEAT EPISODE
To clarify, the US debt ceiling is a legal limit on the amount of money that the US government is allowed to borrow in order to meet its financial obligations. The debt ceiling is determined by Congress and is typically raised periodically to accommodate the government’s increasing borrowing needs.
The US Congress first introduced the debt ceiling in 1917. Since then, the debt ceiling has been raised 78 times. The US treasury (finance department) issued a warning three months back that the government had reached its currently mandated debt ceiling of $31 trillion. Since then, the Treasury has been funding the government through what is known as “extraordinary measures”.
These include suspending investments in certain government funds, using cash reserves, delaying payments and issuing special securities. These extraordinary measures are temporary solutions and are not intended to be a long-term fix to the debt ceiling. Ultimately, Congress must raise the debt ceiling to allow the government to borrow the money it needs to meet its financial obligations.
This time around, Congress (controlled by the Republicans) is proposing to bring down the government’s budget to the level of fiscal year 2022 and limit its annual growth to 1% for the next 10 years.
The proposed cuts would throw a spanner on Biden’s ambitious climate and healthcare legislation. Republican House speaker, Kevin McCarthy articulated his position, saying, “Without exaggeration, America’s debt is a ticking time bomb that will detonate unless we take serious, responsible action. Yet rather than working with Republicans to find a reasonable agreement to tame inflation and provide certainty to the economy, President Biden is demanding that Congress make room for new debt without a single, sensible change to how government spends your hard-earned money.”
IMPENDING DISASTER
If the debt-ceiling impasse is not resolved, the American government could run out of money. The treasury would have to start prioritising spending and so debt obligations and interest payments would receive priority. Tens of millions of government employees including schoolteachers would not receive their salaries on time. Social security payments and healthcare subsidies offered to senior citizens and retired soldiers could be stalled. Experts predict that even a “brief default” could result in the loss of half a million jobs.
Some fear the American GDP would nosedive and render millions jobless. If the US stopped borrowing, it would electrocute global financial markets. The value of American bonds would evaporate and cause a financial meltdown. Global trade would take a hit and the rest of the world could be forced into a recession.
If the US dollar declines, exchange rates would become uncontrollably volatile causing a huge spike in fuel costs. Inflation and a breakdown in the supply chain cannot be ruled out if the debt ceiling is not raised.
THE GOLDEN MEAN
There is a verse in the Qur’ān, which teaches us to follow the golden mean when it comes to spending and saving. It says – “Make not thy hand tied (like a niggard’s) to thy neck, nor stretch it forth to its utmost reach so that thou become blameworthy and destitute.” (The Qur’ān, 17:29)
Allah commands us to avoid being overzealous savers and refrain from squandering our wealth. This rule applies not only to individuals but also to societies and nation-states (microeconomics /macroeconomics). The result of profligate spending is insolvency and destitution. It is exacerbated further if that expenditure is financed by accumulating debt. Unfortunately, this is exactly what American governments did for the last several decades, hoping that their day of reckoning will never arrive.
Americans should pay heed to the advice of their founding father, Thomas Jefferson, who said, “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”