The U.S. Debt Crisis Explained

Via @680News
Josh Ungar
Jul 29, 2011 14:34:55 PM

As the Obama administration's early August debt-deadline continues to approach, it has become near impossible to ignore all the coverage and chatter about the looming U.S. debt crisis. Headlines have been dominated by the constantly shifting story, while those with interests in the stock market have been nervously monitoring their assets.

Doomsayers have called it potentially one of the largest financial crisis in history, while lawmakers have insisted the American government, with the "too big to fail" mentality, will not default. But amidst all the financial and political talk, the very basics of the issue can often be lost.

History

To understand what the debt crisis means, it's important to understand where the problem actually started. The debt crisis in the U.S. certainly didn't happen overnight. The American government has been building up a debt since before 1980 and the Ronald Reagan years. Deficit spending from several American wars overseas and economic downturns have all contributed to the growing debt.

Since then, the Gulf War, tax cuts and the wars in Afghanistan and Iraq have helped push the American government further into debt. With the debt now approaching $14.3-trillion, the Americans have reached what is known as their "debt ceiling." In other words, the government has pushed its debt as far as current legislation will allow.

So what does all this mean?

Most pres singly, the American government is in danger of running out of money, meaning they will no longer be able to pay their social obligations. This includes funding for Medicare, Social Services and defence services.

There is debate about when this will actually happen. The Obama administration says they will run out of money by Aug. 3, while other estimates peg the date closer to Aug. 10. Essentially, when these dates come to pass, the American treasury will no longer have the money to pay its bills without borrowing more cash.

This means the Americans will have to default on their payments, damaging their "AAA" credit rating in international markets. It also means interest rates are likely to rise nationwide. A secondary effect of course will be on the markets, where losses in the U.S. have the potential to spread internationally.

So who does the American government borrow all this cash from?

The money comes from all over, including some from the American public who own pension and mutual funds. A lot of the money has been borrowed from China, Japan and other foreign nations.

Some of the debt is also held within the federal reserve system, which includes collateral for U.S. cash.

So what's next?

This is not the first time the U.S. has to had increase their debt ceiling. Congress has raised or altered the definition of the debt limit a total of 78 times since 1960.

It's likely the American government will compromise and move to raise the debt ceiling, therefore preventing the country's first ever default. At that point it will be up to the government to come up with reduced spending plans and find a way to begin tackling the debt.

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