In his letter addressed to the U.S. lawmakers, Geithner cautioned that the U.S. is dangerously close to reaching its debt limit this quarter. He mentioned that, unless the Congress raises the debt limit within the next few days, the U.S. might be forced to default on its debt because it won't be able to secure any funds from global credit markets.
You see, the debt limit or the Federal borrowing limit is the maximum amount of funds that the U.S. government can borrow. The Congress sets this debt ceiling in order to help the government control its spending, a lot like your monthly credit limit on your credit card. If you've been on a spending binge enough to reach your credit limit, you can't swipe that card no more even if you got a 99% discount on an iPad.
Now if the U.S. reaches its debt limit, it won't be able to fund its spending through borrowing anymore. If that happens, the government would no longer be able to carry on with its massive stimulus programs that are currently propping up their economy.
So exactly how much trouble is the U.S. in?
The U.S. national debt is presently at around 14.01 trillion USD. That's a hairline away from the debt limit of 14.29 trillion USD! Yikes!
Tim Geithner thinks that the 335 billion USD headroom will be maxed out sometime between March 31 and May 16 this year. In fact, he even believes that implementing a few spending cut tricks and returning to spending levels in 2008 will only delay a default by a few weeks!
Aside from that, the U.S. debt has escalated to a whopping 62% of GDP from its 33% figure in 2001. Federal spending has also reached 24% of GDP, the most since World War II.
For many investors, the U.S.'s debt numbers are sitting uncomfortably close to other notorious troubled economies' levels. The U.K.'s public sector net debt as of September 2010 was at 64.6% of national GDP, while Portugal's national debt was at 83.3% in 2010. No wonder Geithner is pressuring the Congress to act fast!
The question is whether Geithner's suggestion will do the trick. I mean, doesn't it sound crazy to address a debt problem with a debt limit increase? That's like giving a shopaholic a limitless credit line!
Naturally, many doubt the effectiveness of Geithner's proposal. The debt limit has already been raised 10 times since 2001. Wouldn't another increase just extend the U.S. deficit even more?
But, as I mentioned earlier, the danger lies not in what will happen if the U.S. raises its debt limit but in what will happen if it DOESN'T. In the event lawmakers fail to raise the federal borrowing limit and the ceiling is reached, the U.S. Treasury will be barred from borrowing additional money, which is why this could all lead to a default.
The problem with a default is that it would raise borrowing costs for the government, and would ultimately trouble the U.S. even more. Some say a debt default may be even more harmful to the economy than the financial crisis of 2008!
I think I'll have to agree with the stance of Speaker of the House John Boehner, or "Bro-ner" as I like to call him, on the matter. Raising the borrowing limit has to be accompanied with cost cuts. While it's true that the U.S. can't afford to default on its debts, it can't just go about borrowing and spending money like there's no tomorrow. Otherwise, the U.S. will just be forced to raise the debt limit once again, and find itself in this very same situation in the near future.