In the upcoming months, the United States Congress will be voting once again to increase the US debt ceiling. Raising the debt ceiling is something Congress has voted in favor of 5 times in the past 3 years. The most recent increase to the debt ceiling occurred on February 12, 2010, where the debt ceiling was increased from $12.394 trillion to $14.294 trillion. The recent proposition by the US federal government to raise the debt ceiling this year proves that Congress would rather continue prolonging our financial problems than actually fix them.
The recently released estimate of BEA economic data for the 4th quarter of 2010 measured the United State’s GDP at $14.660 trillion. With a 2010 GDP measure of $14.660 trillion and an outstanding public debt of $14.13 trillion, the United States has a current debt-to-GDP ratio of 96%. Since the Obama Administration has asked for an increase in the debt ceiling as soon as possible, outstanding public debt levels are expected to increase at least $164 billion in 2011. The current debt ceiling is over 97% of 2010 GDP, so any increase in the debt ceiling in 2011 will bring the US closer to a debt-to-GDP ratio of 100%, or what I like to call bankruptcy. When an individual, business, or nation owes more money than they bring in, they are officially bankrupt and face the severe risk of default.
Right now, the Obama administration, special interests, and mainstream pundits from both parties are making the argument that if Congress fails to raise the debt ceiling in early 2011 the US economy will collapse. They argue that such a collapse will cause a domino effect that will eventually crash the global economy. This scare tactic may work to convince some members of Congress to vote in favor of increasing the debt ceiling, but the reality is that increasing the debt ceiling will cause such problems, not prevent them.
Although raising the debt ceiling will be destructive for the US economy, it is almost certain that Congress will vote in favor of the increase. As the debt ceiling nears 100% of GDP, it is less likely that other nations, mainly China and Japan, will continue to fund the federal government’s shopping spree. This leaves only one option for the United States, which is to monetize the debt by having the Federal Reserve print money to fund government expenditures. Monetizing the debt is a sign of default, and such an action will inevitably devalue the dollar against other currencies in the global economy. It is time the US federal government buckles down and stops spending outside of its Constitutional authority. If the debt ceiling is raised in 2011, the infamous quote by Voltaire will become more relevant than ever, “Paper money eventually returns to its intrinsic value: zero”.