Us Bond Essay

1395 words - 6 pages

1.0.Introduction
1.1.Background
Debt-ceiling crisis in the US, which occurred almost simoultaneously with the global crisis of 2013 sparked a fierce debate in the Congress. Because of the high percentage of foreign investment and funding in the US, the debate became a worldwide issue, creating a negative atmosphere among creditors, especially those that vested heavy interests in US bonds. Fitch International, a globally renowned ratings advisor warned the US Government about the risks of possible credit ceiling, which included lowering of the country’s credit rating – which stood at AAA for a long period – and possible further repercussions on the global economy. It was stated that the concept of debt-ceiling, as it stood, was entirely unsatisfactory and should be amended if the country was to revive its crumbling economy. Debt-ceiling is a virtual spending limit, imposed by the US Congress, which prevents the country from borrowing money after a set amount has been spent. The mechanism was put in place after World War I, but in the modern, liberal economy, countries are forced to borrow money in order to encourage economic growth, making this mechanism a liability. President Barack Obama faced serious difficulties in obtaining Congressional approval for limit raising, which led the country to the brink of bankruptcy in two separate occasions. Final result was the first downgrading of the US credit rating by international rating agencies, lowering it to A-. This was unprecedented, and showed the magnitude of the problem for the legislators in the US and creditors alike. After a fierce negotiation, President Obama managed to raise the debt-ceiling, regaining some of the lost trust from international creditors. Their skepticism is understandable, as US Bonds have long been considered to be one of the safest and most reliable investment opportunities in the business world. Despite the final positive solution, debt-ceiling still poses a significant threat to the long term stability of the US and global Economy. Repercussions of US bankruptcy would be immesurable, causing a spiraling effect throughout every major economy in the world. The main purpose of this paper is to analyze whether or not US treasury bonds still hold their value among investors, despite the growing budget deficit and the ever present fear of debt – ceiling breach.
1.2.History of US debt problem
1.2.1.Early history
Prior to 1917, there was no debt ceiling in the form of legal enforcement. However, in 1917, a statutory debt ceiling has been established, when the Congress voted in the Second Liberty Bond Act. It allowed the administration to issue national treasury bonds and other debt instruments without the approval of Congress, provided that the amount issued was kept below the statutory debt ceiling.
In the 1930s, the US Congress changed the limitations on federal debt, imposing more lenient guidelines, which allowed the Treasury more freedom in spending and borrowing money....

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