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America’s Dangerous Debt Ceiling Debate

Jun 15, 2011 Mohamed A. El-Erian

The world economy is hard-wired to the assumption of a strong America, and Americans benefit from this. But the more their politicians argue over the US government's debt ceiling, the greater the risks that the wiring will become irreparably frayed.

NEWPORT BEACH – It has been raised more than 70 times in the last 50 years, mostly without commotion. It must be raised again this summer if the United States government is to continue paying its bills on time. But now America’s debt ceiling has become the subject of intense political posturing and touch-and-go negotiations behind closed doors. And, obviously, the outcome has implications that go well beyond the US.

As part of America’s system of checks and balances, Congress gets to do more than just approve the annual federal budget. It also sets a limit on how much debt the US Treasury is allowed to issue. Beyond this ceiling, the government can spend only from current revenues.

US Treasury Secretary Timothy Geithner recently informed members of Congress that the government will be in this situation on or around August 2. Having already officially hit the ceiling, the Treasury is moving money around and tapping various pots of unused funds to pay its bills. In a few weeks, this “flexibility” will be used up. With the US government now borrowing around 40% of every dollar it spends, a truly binding debt ceiling would immediately force the government to reduce spending radically and in a disorderly fashion.

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Mohamed A. El-Erian

Writing for PS since 2010
109 Commentaries

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.