The US Sovereign Debt Crisis: Causes and Implications - Annotated Bibliography Example

Full Dr. Tapley Fin 3403 16 February US Sovereign Debt Crisis: Causes and Implications – Critical Article Review The US Sovereign Debt Crisis became a major issue throughout the United States and the rest of the world in the year 2013. It led to a major government shutdown when the Republicans and Democrats could not come up with a consensus on the federal debt ceiling. This paper examines the US Sovereign Debt crisis in the period with the view of analyzing its origins and implications from a financial perspective. The paper will critique three articles and provide an insight into the issue and its consequences. Amadeo Kimberly. “Sovereign Debt Crisis: Explanation for US, Europe, Greece and Iceland Debt Crisis” Amadeo provides an insight into the foundations and basis of foreign debt crisis. She describes the major elements and features of sovereign debt crisis, its implications and impact in the general sense and provides a critical case review of the US sovereign debt crisis. Sovereign debt crisis is a situation where a countrys government is unable to pay its bills (Amadeo para 1). This occurs when the government spends more money than it has. In such a case, the government will not be able to get money from its normal funding sources. Rather, it will need to find ways and means of getting money to fulfill its payment obligation and the most common method is to borrow. In explaining the cycle of sovereign debt crisis, Amadeo identifies that where a government enters a situation where honoring its sovereign debt is an issue, lenders see risks and begin to panic. In other words, the government cannot guarantee a low interest rate for lenders, thus, the lenders become concerned that the country cannot pay its bonds. In such a situation, the lenders will begin to demand higher yields to compensation for the speculation and anxiety that comes with the threat of sovereign debts. They therefore begin to panic and the economy gets into chaos. One of the obvious solutions that most governments employ is quantitative easing which involves the printing of more money to ease the issues with the sovereign debt threats (Amadeo para 7). This causes inflation and affects the value of the nations currency. Thomson Reuters. “Fitch Warns US With Sovereign Downgrade over Debt Crisis” Available at: Details of the US Sovereign Debt Issue Thomas Reuters provides statistical information and facts about the US Sovereign debt criss. As of October 2013, the United States governments borrowing was over $16.7 trillion (Thomson para 4). This was at par to the actual size of the US economy. Thus, as part of a trend, the Fitch rating system sought to downgrade the United States from its AAA rating to a lower rating. Prior to the events of October 2013, notable rating agencies like Standard & Poors had downgraded the USs rating to an AA rating. This occurred in August 2011. Thus, with the United States approaching its debt ceiling, which is the maximum borrowing level set by Congress, there were fears that the US Dollar was going to be hit by a massive downgrade. The US Congress could not agree a deal. Thus, there was a shutdown and the government had to go for days without any authorized budget. This affected some critical aspects of the American public sector. In cases where the government fails to get a debt ceiling that is favorable, the government cannot finance some important sectors of the economy like national defense, Social Security and other sectors and units of the economy . In the normal sense though, the government can auction off new debts by selling some US treasury securities to raise money and this could include bonds which will take money from the public in return for a constant interest. However, where a debt limit exists, there is a cap that is placed on borrowing and congress will need to provide an approval before the government can borrow more money. This was brought to force by the Second Liberty Bond Act, 1917. This Act provides Congress with the power to authorize government spending and debt limits. This enables Congress to provide controls and oversight and also get the Executive to become fiscally accountable to Congress. This also entrenches the concept of Separation of Powers because the opposition parties are able to protest the policies of the ruling government and it forces the ruling party to negotiate with the opposition in order to attain the best interest of the people. McBride Stephen and Merolli Jessica. “Alternatives to Austerity? Post Crisis Policy Advice for Global Institutions” McBride and Merolli identify in their article that the US governments sovereign debt crisis has roots in the global financial crisis that occurred in 2008 (299). The wars in Iraq and Afghanistan caused the US government to spend so much money and resort to borrowing in order to fulfill its primary and fundamental obligations. Therefore, the state had issues with it sovereign spending at home. The United States began to recover after 2010 where the government undertook several austerity measures and government spending was reduced significantly. Neoliberal policies were pitched against Keynesian Welfare system in the post-2008 period because some analysts believed that the US governments neo-liberal policies adopted in the 1970s was responsible for the issues and problems (McBride and Merolli 303). This is because the Keynesian system sought to promote some degree of leniency and full-employment. However, neoliberal views promoted an ideology that supported efficiency and supply-side economics. This was in vogue in the post-2000 period. Thus, it was blamed for the sovereign debt crisis. However, the US sought to make some important cuts and limitations in order to meet the obligations and requirements necessary to attain results. On January 14, 2013, Barack Obama and Ben Bernanke, head of US Federal Reserve asked for the US debt ceiling to be raised in order to enable the US government to meet its recovery objectives. The Republicans refused to grant it and asked the US government to make concessions and cuts. And since they were in control of Congress, they were able to get their own way and prevent the increase of the debt ceiling. Eventually, this led to the shutdown which caused some sectors of the US government and public sector to become non-operational. Masters Jonathan. “US Debt Ceiling: Costs and Consequences” This article provides an overview of the US debt crisis and how it originated. According to Masters, the US Treasury needed to finance its two wars in Iraq and Afghanistan and also rescue the financial system so they resorted to borrowing in order to make enough money to keep the economy running (Masters para 1). The two long wars and financial crisis led to the need to borrow trillions of dollars over the past decade in order to ensure the survival of the US economy. However, the US governments ability to borrow money is limited by statue and Congress sets the borrowing limits of the US government once every two years. In May 2013, the US Congress did not grant any borrowing authority. Thus, the Treasury had to find ways of meeting the financial obligations. In most cases, the US government gets to borrow its funds at the right time and in the right circumstances to meet all obligations. However, in 2013, the issue with borrowing led to major risks and fears that the economy will plunge into crises. In cases where there is a major issue with the refusal of Congress to authorize a new debt ceiling, the US Treasury can take drastic measures (Masters para 12). These measures will be aimed at preventing default in interest payments on national debts. There could be several approaches. One include under-investing some government funds. This will mean there will be some kind of artificial arrangements that will see some bonds and stocks under-invested. Also, the US Treasury can trim or delay the auction of some securities. This was implemented by the US Treasury to ensure survival of the US economy in May 2011 as well as January and May 2013. Where Congress does not act, there could be emergency moves by the Treasury to save the economy. For instance, there could be drastic cuts on federal spendings in order to meet the targets and expectations. This will make things tough in the economy and many units of the economy will suffer harsh and severe processes and procedures due to these cuts. Another alternative is to increase taxes in order to get people to pay more taxes in the short-term to raise the level of funds in the US Treasury. This can be use to offset the debt differences and ensure that the economy remains functional and public sector bills are paid appropriately. However, the risk of raising taxes is that it will slowdown the economy and people will not be earning enough money to inject money into the economy to ensure growth (Masters para 13). Thus, increasing taxes in the short run has its own downside and problems. In cases where Treasury cannot come up with any immediate solutions and all other options fail, the US government might have no other choice but to default. The default will mean that the government will have to cut down on some of its financial commitments and there will be delays in paying some creditors and beneficiaries. There could be some major issues and problems like failure or delay in paying some monies owed by the government. Typically, this will include the delays in the payment of military salaries and Social Security payments as well as other unemployment benefits (Masters para 13). These are payments that could reasonably be delayed as some kind of sacrifice to ensure that the economy moves in the right direction over the long-run. However, on the other hand, if Congress takes an entrenched position, the party in opposition is likely to bear the brunt of the unpopularity that these measures will cause. This is because most debt ceiling increase requests are steeped in the need to salvage the US economy. Hence, if a party in opposition continuously block such requests and people feel the effects of the debt limitations, they are likely to be upset with the party in opposition. Clearly, the Republican party fell in public ratings and opinion polls due to their resistance of increasing the debt ceiling in 2013. This will inevitably have an impact on the partys image in the next elections. Clearly, any government default will have major and far-reaching consequences on the US economy and the US government. This is because the default will send a negative image to foreign trade partners and investors and there will be panic and many things will go asunder in the US economy. Former Federal Reserve Chairman, Ben Bernanke stated that in the event of a US default, the plans and measures that sought to put the US government on the path to recovery will end dramatically (Masters para 17). This is because most government processes and measures that have succeeded over the past years will end in a failure and panic will return. More and more people will be upset with the current administration and there will be a major trend towards a reduced value and enhancement of the economy. The Sovereign Debt crisis also creates some degree of uncertainty in the bond markets and creates pressures on the interest rates. This causes the increases in rates and hike in future borrowing costs for the Federal government (Masters para 18). There is a negative impact on home buyers and mortgages and future taxpayer money will be used to fix these issues instead of building infrastructure in the country to improve the quality of life in the United States. The shutdown that came with the congressional conflict cost the United States a lot of money. The government was not productive and each year, funds were lost due to the disagreements and conflict between the parties involved. This had a negative impact on the economy and could create negative processes and procedures for the future of the United States. The US dollar also stands to suffer. This is because the US dollar is seen as the safest international currency that any nation or community can invest in. Masters therefore asserts that major nations around the world like China, Japan and the Gulf Countries invest heavily in the United States this is because they feel the US will be a safer place to keep their money. In situations where there are debt crisis, they tend to lose confidence in the US economy. The next thing they do is to take huge sums of their money and invest in other economies around the world. Typically, they invest in the European Union or the United Kingdom to diversify their portfolios. This way, they spread their risks and reduce the possibility of losing all their money in cases of major issues and problems with the US economy. Inevitably, such a move will cause the US currency to lose its value and become less effective on the international currency markets. Works Cited Amadeo Kimberly. “Sovereign Debt Crisis: Explanation for US, Europe, Greece and Iceland Debt Crisis”. Available at: . 2013. Web. Masters Jonathan. “US Debt Ceiling: Costs and Consequences” Available at: 2013. Web. McBride Stephen and Merolli Jessica. “Alternatives to Austerity? Post Crisis Policy Advice for Global Institutions” Global Social Policy 13(3) pp299 – 320. 2013. Print. Thomson Reuters. “Fitch Warns US With Sovereign Downgrade over Debt Crisis” Available at: http://profit.ndtv.com/news/global-economy/article-fitch-warns-us-with-sovereign-downgrade-over-debt-crisis-369605. 2013. Web. Read More