The United States Debt Crisis: A Simplified View In the last few weeks, the scale of the United

States debt crisis can scarcely have escaped anyone's attention. The results have been devastating: Panic in markets worldwide, fear of sovereign default, and the first downgrade of US debt in the nation's history. But with the media frantically repeating these terms without explanation, a common question is: What does it all mean? What is the US Public Debt? The United States public debt is, in brief, money borrowed by the US government through the issue of securities by the Treasury. This debt is broadly divided into two components; debt held by the public, including other foreign governments, and debt held by agencies of the US government itself. The two factors affecting public debt are government spending and collected revenues. Spending consists of all government expenditures, some major examples being healthcare, education and defence. The largest contributors to revenues are taxes imposed by the government. The net of revenues and expenses results in either a budget surplus or a deficit, which directly affects public debt. Borrowing of money by the US government is controlled solely by the US Congress, which sets a limit on borrowings, popularly known as the debt ceiling. As of February 2010, the debt ceiling stood at $14.294 trillion. Actual debt levels were $10.4 trillion, a huge difference from the $2.3 trillion surplus forecast for 2011, ten years earlier. Recent Increase in Debt Levels The natural reaction, then, is to question the increase in debt levels over the last decade. By far the largest contributor to this has been the financial crisis of the last few years. One major effect of the recession was a drop in earnings across the United States. This, combined with tax cuts implemented by the Bush administration, led to a massive drop in revenue collected through taxes. Second, the United States has fought two long wars during the last ten years, both of which have increased defence spending to levels previously unseen. Expenses on healthcare and social security have also had a large impact on total government spending. Finally, in the immediate wake of the financial crisis, the US government was required to bail out a number of America's largest institutions, including AIG and General Motors. To further address the subprime mortgage situation, the government was forced to purchase assets from the financial institutions most heavily hit by the crisis. Together with an increase in spending and a drop in collected taxes, this led to a spiralling of US debt to the levels that we see today. Implications The next question, of course, is why one should care about this. Especially in India, where we have been mostly insulated from the worst of the recession, it is easy to assume that we will pass through this next crisis equally unharmed. The implications though, are far reaching. First and foremost is the risk of sovereign default, or the chance that the US government will not be able to pay back what it owes to borrowers. While this might sound extreme, the chances of Congress allowing this to happen remain very low. More likely, though, is the effect that the crisis will have on the strength of the US dollar and on markets worldwide.

Since the US is the world's largest and strongest financial market, a crack in its foundations such as this, will hit financial markets worldwide. All these market fears were confirmed when, on August 5, S&P downgraded the US credit rating for the first time in its history. In the weeks that followed, global markets fell by nearly 5%, with US markets dropping by up to 7% in a single day. The week ending 23 September was one of the worst in history for Asian currencies. Amidst concerns that the Western economies are headed back into recession, investors pulled a large amount of money out of emerging markets, India included, which caused the rupee to lose more than 2% against the dollar during the week. With inflation levels in India as high as they are, this situation is only expected to worsen as foreign institutional investors look for safer places to put their money. Congressional Debate With public debt rising fast, and a risk of sovereign default on the horizon, the debt ceiling has been a much discussed topic over the last few months. Some of the questions raised in Congress have been hotly debated: whether to continue raising the debt ceiling, how much to raise it if so, and how to reduce public debt and the budget deficit in the long term. Clearly, a long term reduction in public debt is necessary. Today's levels are unsustainable, and even the risk of sovereign default has thrown markets into a frenzy. Any reduction in the deficit, however, comes at the cost of government spending or increased taxes, both of which weigh strongly on the minds of politicians. The result of this was that the decision to raise the debt ceiling was made, finally, on August 2nd 2011, just hours before the United States was due to enter a state of sovereign default. The US response The Budget Control Act of 2011 was passed by the US Congress on August 2nd, 2011, to immediately address the debt crisis, and to provide a long term solution to the increasing deficit. To deal with the risk of default, the debt ceiling was raised by $400 billion, with a provision to further increase it by $500 billion on the President's request. To offset this, the US government is required to make $917 billion in specified spending cuts over the next ten years. In addition, Congress is required to approve $1.5 trillion in spending cuts as a long term solution to the growing deficit.