2011 United States debt-ceiling crisis explained

In 2011, ongoing political debate in the United States Congress about the appropriate level of government spending and its effect on the national debt and deficit reached a crisis centered on raising the debt ceiling, leading to the passage of the Budget Control Act of 2011.

The Republican Party, which gained control of the House of Representatives in January 2011, demanded that President Obama negotiate over deficit reduction in exchange for an increase in the debt ceiling, the statutory maximum of money the Treasury is allowed to borrow. The debt ceiling had routinely been raised in the past without partisan debate or additional terms or conditions. This reflects the fact that the debt ceiling does not prescribe the amount of spending, but only ensures that the government can pay for the spending to which it has already committed itself. Some use the analogy of an individual "paying their bills."

If the United States breached its debt ceiling and were unable to resort to other "extraordinary measures", the Treasury would have to either default on payments to bondholders or immediately curtail payment of funds owed to various companies and individuals that had been mandated but not fully funded by Congress. Both situations would likely have led to a significant international financial crisis.

On July 31, two days prior to when the Treasury estimated the borrowing authority of the United States would be exhausted, Republicans agreed to raise the debt ceiling in exchange for a complex deal of significant future spending cuts. The crisis did not permanently resolve the potential of future use of the debt ceiling in budgetary disputes, as shown by the subsequent crisis in 2013.

The crisis sparked the most volatile week for financial markets since the 2008 crisis, with the stock market trending significantly downward. Prices of government bonds ("Treasuries") rose as investors, anxious over the dismal prospects of the US economic future and the ongoing European sovereign-debt crisis, fled into the still-perceived relative safety of US government bonds. Later that week, the credit-rating agency Standard & Poor's downgraded the credit rating of the United States government for the first time in the country's history, though the other two major credit-rating agencies, Moody's and Fitch, retained America's credit rating at AAA. The Government Accountability Office (GAO) estimated that the delay in raising the debt ceiling increased government borrowing costs by $1.3 billion in 2011 and also pointed to unestimated higher costs in later years.[1] The Bipartisan Policy Center extended the GAO's estimates and found that delays in raising the debt ceiling would raise borrowing costs by $18.9 billion.[2]

Context

Under US law, an administration can spend only if it has sufficient funds to pay for it. These funds can come either from tax receipts or from borrowing by the United States Department of the Treasury. Congress has set a debt ceiling, beyond which the Treasury cannot borrow (this is similar to a credit limit on a credit card). The debt limit does not restrict Congress's ability to enact spending and revenue legislation that affects the level of debt or otherwise constrains fiscal policy; it restricts Treasury's authority to borrow to finance the decisions already enacted by Congress and the President. Congress also usually votes on increasing the debt limit after fiscal policy decisions affecting federal borrowing have begun to take effect.[3] In the absence of sufficient revenue, a failure to raise the debt ceiling would result in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. At that point, the government must cancel or delay some spending, a situation sometimes referred to as a partial government shut down.

In addition, the Obama administration stated that, without this increase, the US would enter sovereign default (failure to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets. Alternatively, default could be averted if the government were to promptly reduce its other spending by about half.[4] [5]

An increase in the debt ceiling requires the approval of both houses of Congress. Republicans and some Democrats insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt. There were differences as to how to reduce the expected increase in the debt. Initially, nearly all Republican legislators (who held a majority in the House of Representatives) opposed any increase in taxes and proposed large spending cuts. A large majority of Democratic legislators (who held a majority in the Senate) favored tax increases along with smaller spending cuts. Supporters of the Tea Party movement pushed their fellow Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a constitutional amendment requiring a balanced budget.[6] [7]

Background

Debt ceiling

In the United States, the federal government can pay for expenditures only if Congress has approved the expenditure in an appropriation bill. If the proposed expenditure exceeds the revenues that have been collected, there is a deficit or shortfall, which can only be financed by the government, through the Department of the Treasury, borrowing the shortfall amount by the issue of debt instruments. Under federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a separate vote by Congress.

Prior to 1917, Congress directly authorized the amount of each borrowing. In 1917, in order to provide more flexibility to finance the US involvement in World War I, Congress instituted the concept of a "debt ceiling". Since then, the Treasury may borrow any amount needed as long as it keeps the total at or below the authorized ceiling. Some small special classes of debt are not included in this total. To change the debt ceiling, Congress must enact specific legislation, and the President must sign it into law.

The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling does not have any direct impact on the budget deficit. The US government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office explains: "The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred."[8] The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.[9] [10] From 1979 to 1995, the House of Representatives followed the "Gephardt Rule" which deemed the debt ceiling raised if necessary to cover appropriations.

The US has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every president since Harry Truman has added to the national debt. The debt ceiling has been raised 74 times since March 1962,[11] including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times under Barack Obama.

, approximately 40 percent of US government spending relied on borrowed money.[12] That is, without borrowing, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government,[12] besides the impact on the domestic and international economies. It is unclear if the Treasury has the technological capability to disburse funds to some individuals it owes money.[13] The Government Accountability Office reported in February 2011 that managing debt when delays in raising the debt limit occur diverts Treasury's resources from other cash and debt management responsibilities and that Treasury's borrowing costs modestly increased during debt limit debates in 2002, 2003, 2010 and 2011. If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers that hold US government debt could demand immediate repayment.)

According to the Treasury, "failing to increase the debt limit would . . . cause the government to default on its legal obligations – an unprecedented event in American history".[14] These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt.[15] [16]

Critics have argued that the debt ceiling crisis is "self-inflicted,"[17] as treasury bond interest rates were at historical lows, and the US had no market restrictions on its ability to obtain additional credit. The debt ceiling has been raised 68 times since 1960. Sometimes the increase was treated as routine; many times it was used to score political points for the minority party by criticizing the out-of-control spending of the majority.[18] The only other country with a debt limit is Denmark, which has set its debt ceiling so high that it is unlikely to be reached.[17] If raising the limit ceases to be routine, this may create uncertainty for global markets each time a debt ceiling increase is debated.[17] The 2011 debt-ceiling crisis has shown how a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit.[19]

Concern about budget deficits and long-term debt

Underlying the contentious debate over raising the debt ceiling has been an anxiety, growing since 2008, about the large United States federal budget deficits and the increasing federal debt. According to the Congressional Budget Office (CBO): "At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of fiscal year 2011, the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP) — the highest percentage since shortly after World War II." The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending related to the severe recession and persistently high unemployment in 2008–11.[20] [21] Though a balanced budget is ideal, allowing down payment on debt and more flexibility within government budgeting, limiting deficits to within 1% to 2% of GDP is sufficient to stabilize the debt. Deficits in 2009 and 2010 were 10.0 percent and 8.9 percent respectively, and the largest as a share of gross domestic product since 1945.[22]

In 2009, the Tea Party movement emerged with a focus on reducing government spending and regulation.[23] [24] The Tea Party movement helped usher in a wave of new Republican office-holders in the 2010 mid-term elections[25] whose major planks during the campaign included cutting federal spending[26] and stopping any tax increases.[27] These new Republicans and the new Republican House majority greatly affected the 2011 debt ceiling political debate.[28]

In early 2010, President Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015. The commission issued a report in December 2010, but the recommendations failed to receive enough votes to allow the report to be passed on to Congress.

Throughout 2011, Standard & Poor's and Moody's credit rating services issued warnings that US credit rating could be downgraded because of the continued large deficits and increasing debt.[29] [30] [31] [32] According to the CBO's 2011 long-term budget outlook, without major policy changes the large budget deficits and growing debt would continue, which "would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment – which in turn would lower income growth in the United States". The European sovereign debt crisis was occurring throughout 2010–2011, and there were concerns that the US was on the same trajectory.[33]

Negative real interest rates

Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt.[34] Such low rates, outpaced by the inflation rate, occur when the market believes that there are no alternatives with sufficiently low risk, or when popular institutional investments such as insurance companies, pensions, or bond, money market, and balanced mutual funds are required or choose to invest sufficiently large sums in Treasury securities to hedge against risk.[35] Lawrence Summers and other economists state that at such low rates, government debt borrowing saves taxpayer money, and improves creditworthiness.[36] [37] In the late 1940s and then again in the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP per decade by taking advantage of negative real interest rates, but there is no guarantee that government debt rates will continue to stay so low.[38] In January 2012, the U.S. Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association unanimously recommended that government debt be allowed to auction even lower, at negative absolute interest rates.[39]

This method of negative real interest rates has been claimed to be a form of financial repression by governments as it is "a transfer from creditors (savers) to borrowers (in the historical episode under study here—the government)" and "given that deficit reduction usually involves highly unpopular expenditure reductions and (or) tax increases of one form or another, the relatively 'stealthier' financial repression tax may be a more politically palatable alternative to authorities faced with the need to reduce outstanding debts".[38]

Resort to extraordinary measures

Prior to the 2011 debt ceiling crisis, the debt ceiling was last raised on February 12, 2010 to $14.294 trillion.[40] [41]

On April 15, 2011, Congress passed the last part of the 2011 United States federal budget in the beginning 2012, authorizing federal government spending for the remainder of the 2011 fiscal year, which ended on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion. This includes, public and federal debt, as well as the GDP. Leaving a budget deficit of 38.7%, the world's highest.

However, soon after the 2011 budget was passed, the debt ceiling set in February 2010 was reached. In a letter to Congress of April 4, 2011, Treasury Secretary Timothy Geithner explained that when the debt ceiling is reached, the US Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt, such as the sale of assets from the Civil Service Retirement and Disability Fund and the G Fund of the Thrift Savings Plan. These measures were implemented on May 16, 2011, when Geithner declared a "debt issuance suspension period". According to his letter to Congress, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted". These methods have been used on several previous occasions in which federal debt neared its statutory limit.[42]

The August 2, 2011 deadline

The U.S. Treasury stated on multiple occasions that the US government would exhaust its borrowing authority around August 2, 2011. That date appeared to serve as an effective deadline for Congress to vote to increase the debt ceiling.[43]

While the U.S. Treasury's borrowing authority may have been exhausted on August 2, 2011, it retained cash balances that would have enabled it to meet federal obligations for a short time. According to Barclays Capital, Treasury would run out of cash around August 10, when $8.5 billion in Social Security payments were due. According to Wall Street analysts, Treasury would not be able borrow from the capital markets after August 2, but still would have enough incoming cash to meet its obligations until August 15. Analysts also predicted that Treasury would be able to roll over the $90 billion in US debt that matured on August 4, and gain additional time to avert the crisis.[44]

Projections required for debt and cash management can be volatile. Outside experts that track Treasury finances had said that announced Treasury estimates were within the range of uncertainty for their analyses. Delaying an increase in the debt limit past August 2 could have risked a delay in Social Security and other benefit checks, and could have led to disruptions in scheduled Treasury auctions.

Implications of not raising the debt ceiling

Experts were divided on how bad the effects of not raising the debt ceiling for a short period would be on the economy. While some leading economists, including Republican adviser Douglas Holtz-Eakin, suggested even a brief failure to meet US obligations could have devastating long-term consequences, others argued that the market would write it off as a Congressional dispute and return to normal once the immediate crisis was resolved.[45] Some argued that the worst outcome would be if the US failed to pay interest and/or principal on the national debt to bondholders, thereby defaulting on its sovereign debt.[46] Former Treasury Secretary Lawrence Summers warned in July 2011 that the consequences of such a default would be higher borrowing costs for the US government (as much as one percent or $150 billion/year in additional interest costs) and the equivalent of bank runs on the money markets and other financial markets, potentially as severe as those of September 2008.[47]

In January 2011 Treasury Secretary Timothy Geithner warned that "failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."[48]

Senators Pat Toomey and Jim DeMint expressed deep concern that administration officials were stating or implying that failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis:[49] "We believe it is irresponsible and harmful for you to sow the seeds of doubt in the market regarding the full faith and credit of the United States and ask that you set the record straight – that you will use all available Treasury funds necessary to prevent default while Congress addresses the looming debt crisis."[50]

Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argued that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matured, which it would be unable to do under any conceivable circumstance. He concluded: "There is no alternative to enactment of a timely increase in the debt limit."[51] On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163<ref name=autogenerated9>{{cite web |url=http://thomas.loc.gov/cgi-bin/bdquery/z?d112:s.00163: |title=Bill Summary & Status – 112th Congress (2011–2012) – S.163 – THOMAS (Library of Congress) |publisher=Thomas.loc.gov |date=January 26, 2011 |access-date=August 1, 2011 }}{{Dead link|date=August 2021 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>] that would require the Treasury to prioritize payments to service the national debt over other obligations.[52] (The bill was cleared by its committee for consideration the next day and added to the Senate "calendar of business", but no further action had occurred by mid-August 2011.[53])

Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as ten percent of GDP overnight, leading to a corresponding fall in aggregate demand. Economists believe that such a significant shock, if sustained, would reverse the economic recovery and send the country into a recession.[54] [55]

Proposed resolutions

Congress considered whether and by how much to extend the debt ceiling (or eliminate it), and what long-term policy changes (if any) should be made concurrently.[56]

The Republican positions on raising the debt ceiling included:

(One representative, Ron Paul, proposed transferring $1.6 trillion of Federal Reserve assets to the government and destroying those bonds, thereby reducing the United States gross federal debt by the same amount[59] This would violate the property rights of national banks who own the Federal Reserve Banks.[60])

The Democratic positions on raising the debt ceiling included:

(Some Democratic lawmakers[67] [68] [69] suggested that the President could declare that the debt ceiling violates the US Constitution and issue an Executive Order to direct the Treasury to issue more debt.[70])

The US House of Representatives originally refused to raise the debt ceiling without deficit reduction, voting down a "clean" bill to increase the debt ceiling without conditions. The May 31 vote was 318 to 97, with all 236 Republicans and 82 Democrats voting to defeat the bill.[71] The Republicans largely believed a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long-term issue of debt.[72] Obama and the Democrats in the US Congress wanted an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange supported a decrease in the budget deficit, to be funded by a combination of spending cuts and revenue increases.[73] Some prominent liberal economists, such as Paul Krugman, Larry Summers, and Brad DeLong, and prominent investors such as Bill Gross, went even further, and argued that not only should the debt ceiling be raised, but federal spending (and, therefore, the deficit) should be increased in the short term (as long as the economy remains in the liquidity trap), which they believed would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in the medium to long term.[74] [75]

Some Tea Party Caucus and other Republicans, however, (including, but not limited to, Senators Jim DeMint, Rand Paul, and Mike Lee, and Representatives Michele Bachmann, Ron Paul, and Allen West) expressed skepticism about raising the debt ceiling (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised, and "instead the federal debt [should] be 'capped' at the current limit,"[76] "although that would oblige the government to cut spending by almost half overnight."

Jack Balkin, the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, suggested two other ways to solve the debt ceiling crisis: he pointed out that the US Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by simply issuing two platinum coins in denominations of $1 trillion each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggested, would be for the federal government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Federal Reserve would then credit the proceeds to the government's checking account. Once Congress lifted the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.[77]

In a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling "creates a high level of uncertainty" and an increased risk of default. As reported by The Washington Post, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government's ability to meet its debt obligations."[78] Other public figures, including Democratic ex-President Bill Clinton and Republican ex-CBO director Douglas Holtz-Eakin, have suggested eliminating the debt ceiling.[79]

Possible methods of bypassing the debt ceiling

Fourteenth Amendment

During the debate, some scholars, Democratic lawmakers, and Treasury Secretary Tim Geithner[80] suggested that the President could declare that the debt ceiling violates the Constitution and issue an Executive Order to direct the Treasury to issue more debt. They point to Section 4 of the Fourteenth Amendment to the US Constitution, passed in the context of the Civil War Reconstruction, that states that the validity of the public debt shall not be questioned. Others rebutted this argument by pointing to Section 8 of Article 1 and Section 5 of the Fourteenth Amendment, which state that Congress has the power of the purse and the authority to enforce the Fourteenth Amendment.[81]

Article I, Section 8. The Congress shall have power . . .To borrow Money on the credit of the United States;

Amendment XIV, Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Amendment XIV, Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.

Arguments

Minting coins in extremely high denominations

See also: Trillion-dollar coin.

US law does not place a limit on the denomination of minted coins, and specifically mentions that the Mint can create platinum coins of arbitrary value under the discretion of the Secretary of the Treasury.[91] Yale law professor Jack Balkin mentioned seigniorage as a solution, although there had been speculation about the option of a "trillion-dollar coin" online since at least January 2011.[92] Hence it has been suggested that a coin with a face value of a trillion or more could be minted and deposited with the Federal Reserve and used to buy back debt, thus making funds available.[93]

Monetizing gold

A similar crisis was faced during the Eisenhower Administration in 1953. The debt ceiling was not raised until the spring of 1954.[94] To accommodate the gap, the Eisenhower administration increased its gold certificate deposits at the Federal Reserve, which it could do because the market price of gold had increased. According to experts,[95] the Secretary of the Treasury is still authorized to monetize 8,000 tons of gold, valued under the old law at approximately $42 per ounce, but with a market value worth over $1,600 per ounce.[96]

Agreement

See main article: Budget Control Act of 2011. On July 31, 2011, President Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default.[97] The same day, Speaker Boehner's office outlined the agreement for House Republicans.[98] According to the statement:

Most of the $900 billion in cuts occur in future years, and so will not remove significant capital from the economy in the current and following year. The across-the-board cuts could not take place until 2013. If they are triggered, a new Congress could vote to reduce, eliminate, or deepen all or part of them. Under the U.S. Constitution, the President could veto such a future bill passed by Congress; in such a scenario, Congress would have pass a bill to override this veto by a two-thirds majority of each house of Congress.[99]

The agreement, entitled the Budget Control Act of 2011,[100] passed the House on August 1, 2011, by a vote of 269–161; 174 Republicans and 95 Democrats voted for it, while 66 Republicans and 95 Democrats voted against it.[101] The Senate passed the agreement on August 2, 2011, by a vote of 74–26; 7 Democrats and 19 Republicans voted against it.[102] Obama signed the bill shortly after it was passed by the Senate.[101]

Reaction

US reaction

The national debt rose $238 billion (or about 60% of the new debt ceiling) on August 3, the largest one-day increase in the history of the United States.[103] [104] The US debt surpassed 100 percent of gross domestic product for the first time since World War II.[105] According to the International Monetary Fund, the US joined a group of countries whose public debt exceeds their GDP. The group includes Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent), and Iceland (103 percent).[106]

The NASDAQ, ASX, and S&P 100 lost up to four percent in value, the largest drop since July 2009, during the global financial crisis that was precipitated in part by the United States housing bubble and the corresponding losses by holders of mortgages and mortgage-backed securities. The commodities market also took losses, with average spot crude oil prices falling below $US86 a barrel.[107] The price of gold fell, as deepening losses on Wall Street prompted investors to sell.[108]

On August 5, 2011, Standard & Poor's credit rating agency downgraded the long-term credit rating of the United States government for the first time in its history, from AAA to AA+. In contrast with previous ratings, the agency assumed in the base case scenario that the tax cuts of 2001 and 2003 would not expire at the end of 2012, citing Congressional resistance to revenue raising measures. The downside scenario, the conditions that would likely lead to a further downgrade to AA, assumed that the second round of spending cuts would fail to occur and that yield on Treasury bonds would increase but the dollar would remain the key global reserve currency. The upside scenario, consistent with maintaining the new AA+ rating, included the expiration of the 2001 and 2003 tax cuts and only modest growth in government debt as a percentage of GDP over the coming decade.[109] [110] [111] A week later, S&P senior director Joydeep Mukherji said that one factor was that numerous American politicians expressed skepticism about the serious consequences of a default—an attitude that he said was "not common" among countries with a AAA rating.[112] At the end of 2012, the United States fiscal cliff was resolved in a compromise without expiring the 2001 and 2003 tax cuts, but S&P did not downgrade to AA.[113] The other two major credit rating agencies, Moody's and Fitch, continued to rate the federal government's bonds as AAA.[114]

In a joint press release on the same day from the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, federally regulated institutions were told that for risk-based capital purposes, the debt of the United States was still considered to be risk free.[115]

Congressional reaction

Boehner was reported to be particularly concerned that any defense cuts could not go into effect until after 2013.[99]

International reaction

The international community characterized the political brinkmanship in Washington as playing a game of chicken, and criticized the US government for "dangerously irresponsible" actions.[117]

International reaction to the US credit rating downgrade has been mixed. Australian Prime Minister Julia Gillard urged calm over the downgrade, since only one of the three major credit rating agencies decided to lower its rating.[114] On August 6, 2011, China, the largest foreign holder of United States debt, said that Washington needed to "cure its addiction to debts" and "live within its means".[118] The Chinese state media outlet Xinhua News Agency was critical of the US government, questioned whether the US dollar should continue to be the global reserve currency, and called for international supervision over the issue of US dollar.[114]

The downgrade started a sell-off in every major stock market index around the world,[119] threatening a stock market crash in the international markets.[120] [121] The G7 finance ministers scheduled a meeting to discuss the "global financial crisis that concerns all countries".[122]

Political aftermath

Politically, the crisis caused support for the Republican Party to drop, whose support for the debt-ceiling deal was needed as it controlled the House. The party saw its approval ratings drop from 41 percent in July to 33 percent in August.[123] Nevertheless, President Obama saw his approval ratings drop to a record low of 40 percent in regards to his handling of the crisis.[124]

Timeline

See also: History of United States debt ceiling increases. Although the US has raised its debt ceiling many times before 2011, these increases were not generally coupled with an ongoing global economic crisis.

See also

External links

Notes and References

  1. Government Accountability Office. "Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs." GAO-12-701. July 2012. http://www.gao.gov/assets/600/592832.pdf.
  2. Bipartisan Policy Center. "Debt Limit Analysis." November 27, 2012. http://bipartisanpolicy.org/sites/default/files/Debt%20Limit%20Analysis.pdf .
  3. Web site: Analysis of 2011-2012 Actions Taken and Effects of Delayed Increase on Borrowing Costs. Government Accountability Office. November 27, 2012.
  4. http://www.slate.com/id/2300207/ It's Not "Default" By Annie Lowrey at Slate
  5. http://www.creditwritedowns.com/2011/05/debt-ceiling-chance-default.html Debt Ceiling: No Chance of US default By Warren Mosler at creditwritedowns.com
  6. News: McCain blasts "bizarro" Tea Party debt limit demands. CBS News. Stephanie Condon. July 27, 2011. July 30, 2011.
  7. News: Reid, Boehner Outline Competing Deficit Plans. Fox News. Associated Press. July 25, 2011. July 29, 2011.
  8. News: Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market . . February 22, 2011.
  9. Web site: Debt ceiling crisis: The debt ceiling is a pointless, dangerous relic, and it should be abolished. Annie. Lowrey. Slate. May 16, 2011. August 1, 2011 .
  10. Web site: Moody's: Abolish the debt limit. Jennifer. Epstein. Politico. August 1, 2011. July 18, 2011 .
  11. News: Debt ceiling FAQs: What you need to know. CNN . Jeanne . Sahadi. May 18, 2011. August 1, 2011 .
  12. Web site: Letter to the Hon Jim DeMint . Secretary of Treasury . June 28, 2011 . July 29, 2011 . Timothy Geitner . .
  13. News: Treasury Crafts a Plan: Who Gets Paid, Who Doesn't . July 28, 2011. Damian Paletta. The Wall Street Journal . July 29, 2011.
  14. Web site: Get the Facts: Raising the Debt Limit. US Department of the Treasury. July 20, 2011. August 1, 2011 .
  15. News: Treasury to Explain Who Gets Paid, Who Doesn't if Debt Cap Not Raised . Fox News . April 7, 2010 . August 1, 2011.
  16. News: Debt Ceiling: Chaos if Congress blows it. July 14, 2011. CNN . July 29, 2011 . Jeanne . Sahadi.
  17. News: Interview with GM's Dan Akerson; Killing in the Name of the Knights Templar; Interview With Christine Lagarade . CNN . July 31, 2011 . August 1, 2011.
  18. Web site: CRFB-Understanding the Debt Limit-July 14, 2011 . October 31, 2011 . October 7, 2011 . https://web.archive.org/web/20111007235301/http://crfb.org/document/understanding-debt-limit . dead .
  19. http://www.offthechartsblog.org/the-most-terrifying-result-of-the-debt-ceiling-crisis/ CBPP-The Most Terrifying Result of the Debt Ceiling Crisis-August 2, 2011
  20. http://www.cbo.gov/ftpdocs/122xx/doc12212/2011_06_22_summary.pdf "CBO's 2011 Long-Term Budget Outlook"
  21. News: America's Sea of Red Ink Was Years in the Making . The New York Times . David. Leonhardt. June 10, 2009.
  22. News: Why the U.S. may never have a balanced budget again . CNN . March 29, 2012 . June 26, 2012 . Lisa . Desjardins.
  23. Web site: Anti-tax-and-spend group throws "tea party" at Capitol . Deseret News . March 7, 2009 . August 1, 2011.
  24. Web site: Berman . Russell . Gallup: Tea Party's top concerns are debt, size of government . . July 5, 2010 . August 1, 2011.
  25. Web site: Republican wave swamps the U.S. in mid-term elections . Herald Sun . Australia . November 4, 2010 . August 1, 2011.
  26. Web site: Cutting Spending . GOP.gov . August 1, 2011 . July 19, 2011 . https://web.archive.org/web/20110719094327/http://www.gop.gov/pledge/cutspending . dead .
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