Debt Ceiling: To Raise or Not to Raise

Recently all the talk has been about the United States reaching their $14.3 trillion debt ceiling. Moody's rating agency just announced today that the Aaa rating of the US's short term credit would be under review if no significant improvement had been made in reducing spending or raising the debt ceiling by this July. The government of the US is gridlocked with the conservatives stressing more spending cuts and no raise in the debt ceiling while the liberals want the debt ceiling raised. Both sides are stressing the need to run a surplus to reduce the deficit but lets just look at the debt ceiling.

Politics aside I think the debt ceiling need to be raised and the United States' Aaa credit rating needs to be maintained at all costs. The debt ceiling has been raised 8 times since 2000 and I agree that this trend needs to be stopped however it should be stopped buy reducing the deficit through raising income and cutting spending and not by setting a limit and risking default on our debt. While keeping the debt ceiling where its at does not mean a default is imminent is does mean a review of a credit and I do believe the will lower our rating. If the rating falls from its current Aaa rating it would make paying off our debt even harder. As we saw in corporate examples, companies ran in the red because of cheap credit as a result of their good credit rating. AIG was operating by paying off old debt with new debt until its rating was lower and new debt suddenly cost a lot more than the old debt they were trying to pay off. I realize this is only one factor in AIG's collapse but it is a good example of what could happen to the US.

Last year, 2010, the United States payed $413,954,825,362.17 in interest expense. The total debt from 2010 was $13,561,623,030,891.79 this gives an average interest rate of 3.05% for the year 2010. A downgrading of US debt would cause interest rates they pay on their debt to raise. a 1% raise of rates on 2010's debt would equal $135,290,907,400 more in interest rate expenses or an extra 1% of the US GDP for 2010. This is something the United States cannot maintain for much longer. This year the US debt is $14.7 trillion and I expect for the first time will hit 100% of GDP. The debt ceiling needs to be raised to avoid a downgrading with the stipulation that this will be the last raise and that major reduction measures will be enacted.

All is not doom and gloom when you take it in perspective. The United States is still far from becoming a Japan. Japan has  225% of debt to GDP while the US is flirting with 100%. Even on the list of the worst of countries debt-wise the United States is still behind the world average and ranks 36 out of 128 on the ranks behind the United Kingdom and Germany. Obviously this scaled is skewed towards the debt heavy countries but it shows the United States is not alone in sovereign debt crisis. The entire world needs to look and its spending and revenues and realize what is a maintainable level of debt/surplus is.