mfs article review

8/6/2019 MFS Article Review

1/5

Management of Financial Services

Article: Critical Review

Submitted to:

Prof. Prem Sibbal

Submitted By:

Sourish Dutta

Sec: B

46/2010

PGDM (General)


2/5

Debt Debate for Dummies: Six Keys to Understanding

the Issue

The American government is broke. Rather, like many American families, it uses borrowed

money to operate on a daily basis. But unlike the average American, the government doesn't

ask a bank or credit card company for more money; it can sell more debt on the open market

and raise its own credit limit.

The government has sold debt almost since the beginning of the Republic. You can buy it in

the form or Savings Bonds. Institutions, governments and professional investors from around

the world also buy debt, but in much larger quantities. The Social Security system owns the

most U.S. debt. Foreign governments, including China, own 31 percent.

With government spending and taxes key political issues, the Republicans and the Democrats

cannot agree on how much more money to spend and borrow. If an individual wanted to

borrow more, he would ask his bank to raise his credit limit. The government can do this by

getting Congress to raise the debt ceiling.

And so White House and Congressional negotiators have been in closed-door negotiations for

months trying to figure out a way to change the way the government spends money before

they agree to borrow more.

Here's a simple guide to some key points of the debate:

How much money does the government owe?

The U.S. government owes more than $14.34 trillion dollars and counting. The average

citizen's share of that debt is about $46,000. The government reached the legal debt ceiling on

May 16, when it owed $14.29 trillion, but the Treasury Department has averted default by

placing IOUs in some federal worker retirement accounts. On Aug. 2, this will no longer be

permissible, according to Treasury Secretary Timothy Geithner. Congress has to approve

raising the debt ceiling before then in order for the government to be able to pay all its bills.

How much more does the government need to borrow?

The figures are astronomical. The government pays more than $1 billion each day just on

interest on the debt. Overall federal spending is more than $10 billion a day for all the

services the government provides.


3/5


4/5

What happens if the government defaults?

This is a subject of some debate. Many Republicans have argued that if the government goes

beyond Aug. 2 without raising the debt ceiling, Treasury will simply have to continue paying

its creditors and stop funding other programs. But others argue that going past the Aug. 2

deadline would send a bad signal to global markets, put the U.S. credit rating in jeopardy,

lead to higher interest rates, and kick off a worldwide recession.

David Walker, the former Comptroller General of the U.S. who is now a cut-the-deficit

evangelist, said Thursday that people who own bonds will get their money. But there will be

a $4 billion daily gap that the Treasury Secretary must close. Federal workers and contractors

might not get paid.

Others are less alarmist. Sen. Jeff Sessions, the top Republican on the Senate Budget

Committee, vowed recently that the U.S. government, even after Aug. 2, will pay its bills tocreditors. The question then becomes, however, what will it not pay and whether paying

creditors but not government employees or businesses that work with the government might

be considered a default?

"Choices won't be about, Do we means-test retirement for the wealthiest, but do we make

dramatic cuts in vital programs?" said Ryan McConaghy of the centrist Third Way.

Why not just raise taxes on the rich?

Economists agree that there is no silver bullet to solve the problem of the debt. You can't just

raise taxes and make it go away.

According to McConaghy, if the government taxed every dollar that every American made

over his or her first $250,000 in income, it still would not solve the problem.

There is some indication that policymakers want to use this opportunity to simplify the tax

code. Americans pay a high tax rate, but enjoy breaks for everything from having children to

charitable donations to interest they pay on their mortgage. The tax rate could be lowered if

those loopholes were removed. But more people making less money might have to pay taxes.

The same works for companies. They benefit from loopholes for research and development,

certain investments and more. Removing those loopholes is perhaps more likely, but it will

not solve the problem of the debt. Add to this the unity of Republicans against any tax hikes.


5/5

\Why not just cut government spending?

Just like raising taxes on the rich won't work, cutting spending alone won't work either. The

retiring Baby Boom generation will start collecting Medicare and Social Security benefits.

Just as most Republicans reject tax increases, most Democrats have rejected cuts to these

programs. But short of scaling back benefits, annual cost of living increases, or raising the

retirement age, the programs will soon spiral out of control. The trustees for Medicare have

said that in its current trajectory, the program's hospital insurance account will run out of

money in 2024.

How can the problem be solved?

Both sides, Republicans and Democrats, are probably going to have make very tough

decisions. For Democrats that may mean cuts to entitlement programs. And for Republicans

that may mean tax hikes. Many believe that both parties have to take part in the solution toget the public on board with it.

"We're going to need both revenue s and spending cuts. Certainly at the higher end of the

scale, people are going to have to accept higher taxes," said McConaghy. "They either leap

together or they don't leap at all, but if they don't leap at all, the markets will push them into

much more difficult choices," said McConaghy.

But that brings us to the closed-door meetings at the White House. President Obama and

House Speaker John Boehner and their respective cohorts are trying to find an agreement that

averts default -- and may make everyone equally unhappy.

mfs article review

Documents