The USA can Effectively Lift the Debt Ceiling to Infinity

On 27 December, U.S. Treasury Secretary Timothy Geithner announced that, as early as 31 December, the US government would officially hit its current authorized borrowing limit - also known as the debt ceiling - of $ 16,394 trillion, as a result of which Washington would be forced to default on its financial liabilities.


Last time, the federal debt ceiling had been raised in late January 2012. In accordance with the US law on the government debt ceiling, if no deal could be worked out for large-scale expenditure cuts, in 2013 the USA will be faced with the so-called sequestration cuts by $ 1.2 trillion.  Expenditures on defense programs will be cut by 9.4%, Medicare payments by 2%, and research and educational projects – by 7.6%.
US government debt has become an ever-present issue. Thus, for example, on 4 August 2011, Standard & Poor's downgraded its US credit rating - for the first time since the 1860s – which caused a downfall on the world stock markets.

However, the federal debt is by no means a key issue for the US government, because its first target priority is to revive economic growth. At the top of its agenda are the efforts to bring down the unemployment rate and revive production. So, the Treasury and Senate will be forced to further raise the debt ceiling. Most likely, in order to avoid battling with the same issue over and over again every year, some measures will be undertaken in order to achieve significant spending cuts, on the one hand, and tax increases, on the other.

It is absolutely impossible that the Congress may refuse to further raise the debt limit. If a technical default should indeed be announced on US bonds,  it will have a negative effect on the world’s entire financial system, as practically every country has some investment in the USA (from China and Japan to Chile and the Philippines). And the world economy, due to the eurozone crisis, is currently by no means in its best shape.  

In fact, the US debt ceiling may be raised indefinitely. Thus, for example, Japan’s domestic government debt amounts to more than 200% of its GDP. And this high debt level does not even result in inflation.
A. L. Vedev – Director of the Structural Research Center