If you are in the United States you are probably aware that the debt ceiling has been raised and the country’s rating has (so far) maintained its high status. That’s nice, but what does it mean in real life? It might be easiest to treat the country like a person, say you or me.
The US, by raising its debt ceiling, has basically extended its own line of credit. This is as if you had maxed out your credit card but then raised the spending limit (don’t expect VISA to offer that option anytime soon) so you could keep on buying. This is good if the money you then spend earns you more money, so you can start paying back what you owe and you never have to default on your monthly payment. Likewise, if the economy picks up the US can use future gains to pay back what it owes. If the economy doesn’t pick up, however, the US will just accumulate more debt and will have the same problem (albeit more severe) in the near future.
So the US needs to earn more money. What would you do if you needed to earn more money? Well, you could start by cutting down on lattes at Starbucks and other measures. Maybe you could eat in more often. Or maybe you could trade in your car for a bike. These are what is called Austerity in economics. The US decides to cut back on its spending. The most affected sectors are usually welfare benefits and development projects.
But, of course, cutting down on spending only takes you so far. You will also have to start making more money. You could do this by getting a second job, a part time job, freelancing, etc. The US tends to do this by raising taxes and public transport fees.
Here is the problem, however. You new job is across town, but you sold your car for a bike. Your freelance job requires a flipcam, but you can’t afford to buy one. Or you have to network more to get that new project, but you don’t have a budget for eating out. Likewise, the US took away benefits and raised fees for its citizens, while asking for more taxes.
There is one other option, however. This is exports. It’s as if you took all your belongings and had one big garage sale (or sold them on eBay or Amazon), or you decided to sell cakes or become someone’s personal assistant. This, too, is good. Except you discover that all your neighbors and the neighboring towns are going through the crisis as well. This is what the US finds when it tries exporting to Europe, which is going through its own economic turmoil. In other words, the US could try to rely on exports, but other countries are going through a process of debt reduction.
So you can turn to other towns further away. The problem here is that they tend to have much lower incomes than your neighborhood. In fact, what if their income and spending were tied to yours? This isn’t common for people, but more common with countries when they peg their currencies, as China did with the US.
So you could maybe move to a cheaper part of town, or a cheaper town. Except if your potential buyers’ income and spending are tied to yours, this means they can suddenly buy less regardless. In fact, when they are going through hard times, they try to find more ways to raise your income and spending so theirs can go up. In other words, the US could try to have the dollar depreciate, and therefore increase its exports, but America’s second largest trading partner, China, has its currency pegged to the dollar, which means the dollar won’t be cheaper for them. In fact they’ll resist a dollar depreciation. On top of this, when investors worldwide seek a safe base, they buy US treasuries and debt, thereby strengthening the dollar further.
So what do you do? The more you cut back, then less you can invest in your career. You can try to sell your goods or offer your services to neighbors, but they’re going through the same problems you are. Moreover, neighboring towns have their salary and spending levels tied to you and your town, so they suffer when you try to cut back as well. At a certain point you run out of a market to sell goods to, and suddenly your credit card is maxed again. Time to raise the spending limit once more?