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The Debt Ceiling. On august 1, 2011, the House of Representatives passed a bill to raise the debt ceiling by at least $2.1 trillion and cut federal spending by $ 2.4 trillion or more. The move prevented a possible U.S default and preempted an acute fiscal crisis. The federal government had once again reached its legal limit to borrow money meaning that it could not issue new treasury debt without action by congress to raise the debt ceiling. Although the extent of U.S government reaching the legal limit is an unfortunate situation, going by current situation, the hiked debt ceiling will have far reaching benefits to the financial markets.
To understand the implications that hiked debt ceiling will have on the financial market it is important to know what would have happened if the debt ceiling was not raised. As Cooper and Story observes, the legal limit places the treasury on two requirements (2011).
Overall, the functioning of the financial market could have been greatly impaired if the House of Representatives rejected the bill. The federal government could have been forced to undertake extraordinary measures that could have affected the functioning of the financial market. If the limits were not raised, the Treasury could have been forced to under-invest in certain government funds, suspend the sale of nonmarketable debt and trim or delay auctions of securities. A failure to raise the debt limit would have resulted to a default which could have sparked another financial crisis.
Cooper, M. & Story, L. (July27, 2011). Q. and A. on the debt ceiling. The New York Times.
Department of the Treasury (2011). Debt Limit: Myth v. Fact. Retrieved on February 2, 2012 from http://www.treasury.gov/initiatives/Documents/Debt%20Limit%20Myth%20v%20Fact%20FINAL.pdf
Levit, M et al. (2011). Reaching the debt limit: Background and potential effects on government operations. Washington, DC: Congressional Research Service.