Unfortunately…this ceiling can’t be fixed with some Spackle and elbow grease! The debt ceiling has some pretty large holes and everyone’s to blame, but it’s nobody’s fault!
For those that don’t have BNN playing 24/7 at reception in their office, the debt ceiling is the amount of the money the US government is allowed to borrow to meet its existing legal obligations. The US Treasury has authorization to borrow money to meet these obligations as long as they do not exceed a set “ceiling.” Once the debt ceiling is reached (which happened in mid-May), congress can bridge the gap until new arrangements can be worked out (the deadline for the proposal is August 2nd). The debate currently running through congress is whether or not the debt ceiling should be increased or eliminated completely. Obviously is a lose-lose as both answers have consequences and pose potential long-term problems.
Congress’ decision will have large effect on Canada, being that the US is our largest trading partner. Warren Jestin, Scotiabank’s chief economist, commented that a default would mean increased volatility in the bond markets in both the US and Canada. However, he believes that a default is unlikely as Congress will reach an agreement to raise the debt ceiling. In that case, Jestin believes that this will be good for Canada as it will increase the ability for them to compete.
For the general public, a US default would have dire consequences. A survey of US companies shows that should the US default, they would institute hiring freezes and layoffs. Not only would this increase unemployment, but it would also continue to add to the current volatility of the economy and further damage the reputation of the US globally.
Fortunately, many experts, including Warren Jestin, predict that a US default is unlikely as they believe Congress will ultimately come to an agreement by the August 2 deadline.