The Impact of Debt Ceiling on American Economy Is Overestimated

By Pablo Gibson · Monday, November 28, 2011

Although the American financial system completely rendered down in late 2008, the fact is that most of the citizens of the U.S. have no idea what's going on in the American economy. During the time of recession, the Americans were not really keen on living beyond their means. They became cautious of their credit card debt. But in the last two years, they have once again started getting involved in an unscrupulous usage of credit cards. Most of them think that the phase of recession is nearly over and they would be experiencing another time of economic development very soon.

Debt ceiling is in fact the "Statutory Debt Limit" employed by the U.S. Treasury to keep the wheel of their state's indebtedness rolling. The debt ceiling was fixed to control the amount of fresh debt that the treasury might issue once the debt ceiling level was achieved.

The debt ceiling of the government has been the topic of a fiery debate in Washington. Many politicians and economists were of the view that the debt ceiling should be raised in order to avoid any economic disaster. As a result of the growing debt in America, a number of awaiting catastrophes have been intimidating the Americans for years now. In spite of the fact that an increase in debt ceiling only offers an external and temporary relief, there are people who give too much importance to the outcome of the debt ceiling elevation. Virginia Senator Mark Warner states that failing to lift up the debt ceiling would result in increase of interest rates and destruction of consumer confidence. It would also pull down job establishment and business investments. The concept of changing the real economic conditions of America by merely raising the debt ceiling comes from an abstract view of the economy. Since the economy is something very real and not just an abstraction, it is quite improbable that a debt limit would noticeably influence real economic conditions.

It's stated that if the debt ceiling is not increased, the U.S. shall fail to make its loan payments and it would thus have a negative impact on their credit rating. Consequently, the interest rates would also raise, since lenders charge an extra fee for the additional risk of default. This threat isn't wiped out even if the debt ceiling is raised, and it will carry on being a threat if the government spending is not controlled.

Politicians ought to take significant steps in bringing about economic recovery. Financial development happens best when citizens are left to their individual policy and not when the administration engineers the procedure by increasing the money supply here or hoisting the debt ceiling there.

Pablo Gibson is an Associate Editor with Oak View Law Group. He has been writing on financial topics over the years with special focus on American and European economy. Pablo also takes interest in debt related issues and contributes articles on debt relief to personal finance blogs.

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