WHAT IS U.S. DEBT CEILING AND WHY WAS IT RAISED, WHAT ALL DID ROCKED THE FINANCIAL MARKETS ALL OVER THE WORLD IN LAST 15 DAYS?

The U.S. Treasury has borrowed trillions of dollars over the past decade, much of it from foreign investors, to help finance two long wars, rescue its financial system, and promote economic growth through fiscal stimulus. The government must be able to issue new debt as long as it continues to run a budget deficit--the current shortfall is about $125 billion per month. As the national debt approaches its statutory limit of $14.29 trillion, concern mounts over the consequences of congressional delay or paralysis in extending the government's ability to borrow. The United States has never failed to raise its debt limit, hence any failure to do so would have plunged the government into default and precipitate an acute fiscal crisis. Lawmakers from both parties conceded that there were dire consequences associated with a default, but some Republican members of Congress planned to use the debt limit as a negotiating chip to extract deeper spending cuts and long-term fiscal reforms from the White House.

What is the U.S. Federal debt limit?

The debt limit or "ceiling" sets the maximum amount of outstanding federal debt the U.S. government can incur by law. This number stood at $14.29 trillion in the spring of 2011. Increasing the debt limit does not enlarge the nation's financial commitments, but allows the government to fund obligations already legislated by Congress. Hitting the debt ceiling would hamstring the government's ability to finance its operations, like providing for the national defense or funding entitlements such as Medicare or Social Security. Under normal circumstances, the government is able to auction off new debt (typically in the form of U.S. Treasury securities) in order to finance annual deficits. However, the debt limit places an absolute cap on this borrowing, requiring congressional approval for any increase (or decrease) from this statutory level.

The debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised the cap seventy-four times since 1962.

When will the United States hit its debt ceiling?

On May 16, 2011, Treasury Secretary Timothy Geithner wrote a letter to Congress announcing that the United States had reached its statutory debt limit and that "extraordinary measures" would be taken to stave off a default until August 2.

How much would the debt limit need to be raised?

President Barack Obama's proposed budget for 2012 would require a nearly $2.2 trillion hike in the debt ceiling just to meet the government's obligations for next year. The proposed Republican spending plan would entail $1.9 trillion in new borrowing by October 2012.

What could the government have done if the debt limit wasn't raised?

The U.S. Treasury could take special emergency measures to forestall a default--the point at which the government fails to meet principal or interest payments on its debt. These include under-investing in certain government funds, suspending the sales of nonmarketable debt, and trimming or delaying auctions of securities.

On May 6, Treasury began implementing these measures by indefinitely suspending the issuance of State and Local Government Series (SLGS) Treasuries--bonds that help states and municipalities conform to certain IRS regulations. The SLGS window has been closed six times in the past twenty years. On May 16, Treasury announced it would begin a "debt issuance suspension period" as a result of the United States hitting its debt limit, including the suspension of additional investments of amounts credited to the Civil Service Retirement and Disability Fund.

If the debt limit is reached despite such measures, federal spending would have to plummet dramatically or taxes would have to rise significantly (or a combination thereof). However, Geithner warned that because the government's obligations are so great, "immediate cuts in spending or tax increases cannot make the necessary cash available." If Treasury is unable to issue new debt or take further emergency actions to bridge the deficit, the government would be forced to default on some of its financial commitments, limiting or delaying payments to creditors, beneficiaries, vendors, and other entities. Among other things, these payments could include military salaries, Social Security and Medicare payments, and unemployment benefits.

What are the implications for financial markets?

Most economists, including those in the White House and from former administrations, agree that the impact of a government default would be severe. Federal Reserve Chairman Ben Bernanke has labeled a U.S. default a "recovery-ending event" that would likely spark another financial crisis. But short of default, officials warn that legislative delays in raising the debt ceiling could also inflict significant harm on the U.S. economy.

Geithner has argued that congressional gridlock will sow significant uncertainty in the bond markets and place upward pressure on interest rates. He warns that the increase would not only hike future borrowing costs of the federal government, but would also raise capital costs for struggling U.S. businesses and cash-strapped homebuyers. In addition, rising interest rates would divert future taxpayer money away from much-needed capital investments such as infrastructure, education, and healthcare. Estimates suggest that even an increase of twenty-five basis points on Treasury yields could cost taxpayers as much as $500 million more per month.

What are the implications for the dollar?

A shrink in demand for U.S. Treasuries would push down the value of the dollar relative to foreign currencies.

While many U.S. exporters would benefit from currency depreciation because it would increase foreign demand for their goods, the same firms would also bear higher borrowing costs from rising interest rates.

A potential long-term concern of some U.S. officials is that persistent volatility of the dollar will add force to recent calls by the international community for an end to its status as the world's reserve currency.

Historically, the U.S. Treasury market has been driven by huge investments from surplus countries like Japan and China, which view the United States as the safest place to store their savings. A 2009 Congressional Research Service report suggests that a loss of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings, thus inducing others to do so, and causing a run on the dollar in international markets. Others claim that a sudden sell-off would run counter to foreign economic interests, as far as those interests run parallel to a robust U.S. economy.

The U.S. rating agency Standard and Poor's (S&P) in April, threatened to reduce the U.S. credit rating from its long-held "AAA" status, downgrading its outlook from "stable" to "negative" for the first time. The agency said "there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013."

In July Moody’s warned of a possible downgrade too and said the review was prompted by the possibility that the U.S. debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

The global financial crisis, which was rooted in poor regulation of the US housing and banking sectors, already tarnished perceptions of the United States overseas.

United States is home to not only the world’s largest economy but also it’s most liquid and safe debt market, the repercussions of a US financial meltdown are potentially much larger than a more contained emerging-markets crisis.

If the United States had been downgraded, interest rates could rise, risking a new recession. The recovery is already being hampered as the threat of a debt default deals a further blow to consumer confidence.

Both Republicans and Democrats have become addicted to debt and it was just assumed the debt ceiling would get passed automatically.

In a given month the Treasury owes roughly about $30 billion as interest on its debt and the Treasury takes roughly about $200 billion in on average in a month.

Though the debt ceiling is getting all the attention, the real issue is the rapid growth of government debt.  The Federal government is borrowing roughly 44% of what it spends.  That is why it keeps running into the debt ceiling.  The debt ceiling is really just a technicality.  The long-term issue is the size and scope of government and growing debt is just a symptom of that.

Take a look at how much Federal spending has increased in just the past few years. 

Federal Budget Year                   Amount Spent

2008                                             $2.98 trillion

2009                                             $3.51 trillion

2010                                             $3.46 trillion

2011 (est.)                                   $3.81 trillion

Markets all over the World were in extreme fear, already the were battered by the European Debt Crisis and now it was U.S., the Super-Power. It was completely unbelievable for the markets to see U.S. in such a condition. This was the only reason, markets all over the globe witnessed a dismal sell off.

U.S. have raised the Debt Limit again this time, but if a deep insight is taken, this raising of Debt Limit has raised the Debt  available for U.S. The economy is currently standing on a Huge Pile of Debt, which one or other day, will drown the Whole World Economy to a new low.