Question

Governments can incur debt when: covering deficits, financing capital projects, and covering short periods within a fiscal year in which bills exceed cash on hand. Although this is a common practice, there are argument pro and against governments borrowing money. The debate is ongoing. Using the reading materials for this class please answer the following questions.

1. Describe the advantages of government money borrowing.
2. Describe the disadvantages of government money borrowing.
3. In your opinion, should governments borrow money? Why? Why not?
4. Considering all the pros and cons of borrowing money, do you think debt ceiling is a necessary tool to control government debt?

Answer 1

advantage

The major advantage of having government debt is that it allows the government to do more things than it otherwise could. This is similar to how borrowing money to buy my house allows me to do more things. If government uses its debt wisely (by investing), this is fine.

A second advantage is that it allows government to be flexible in fiscal policy. If a government has no debt, it has no way to stimulate the economy during a recession.

If a government has no debt, it also cannot show that it is credit-worthy. If it suddenly needs to borrow, it will have to pay high interest rates.

DISADVantage

1  Disadvantage: You Risk Foreclosure if You Can’t Repay The Loan

2  

Disadvantage: Guarantee Secured

If the loan is secured by guarantee, then it means that someone else has cosigned on the loan and it is their personal assets or the assets of their business that are on the line. If you don’t repay the loan, you will be putting someone else at risk.

3  

Disadvantage: High-Interest Rates

When you take a loan from a bank, there is always the chance that interest rates could go up over time, especially if you’ve taken a loan with variable interest terms. That could potentially make the loan very difficult to repay.

4 Disadvantage: It Could Ruin Your Credit

5 Disadvantage: The Application Process Can be Complicated

6Disadvantage: Risking Your Credit Score

opinion

However the ability to borrow that is implicit in government debts enables a country and its government to adjust its actual level of spending below or above the level of money available from taxation and other resources. Thus in case of economic down turn the government can borrow money and spend more money to give a boost to the economy. The money thus borrowed can be repaid in periods of boom when the country may find it convenient or even preferable to cut down its spending below amount available through taxation.

debt ceiling

The debt ceiling is the legal limit on the total amount of federal debt the government can accrue.

The US debt ceiling is similar to the Credit Limit on your credit cards, or like the home equity line of credit you got from your bank back before the recession when such loans were very common the bank would set a value on your home and establish how much of that value you owned via equity and then authorize you to borrow up to some % of the value of your equity in the home and you could draw down that loan until you reached the preset limit then you had to pay it down before you could tap into it again.

The Debt Ceiling is the amount that the Congress has authorized the Federal Reserve and the Treasury Department to borrow on behalf of the United States of America. This borrowing is done in the form of the Treasury Department issuing Treasury Bonds that are then sold by the Federal Reserve to the open market via auctions that take place weekly. There are many different kinds of Bonds issued short term, long term, inflation protected, Savings Bonds ect.