Denmark and the United States may not be comparable in terms of the sizes of their economies, but they do have one unique bond - they are the only 2 developed countries to have a debt ceiling. As I write this, the United States is caught up in political wrangling in Congress over the annual budget which, if not resolved imminently, could result in the non payment of interest on government debt, effectively putting the largest economy (and the world's "least risky" asset) in technical default.
Most governments simply issue debt when the cash coming in from tax collections is insufficient to cover the bills coming due from government spending. Both the United States and Denmark however have put a dollar limit on how much debt the government can issue. This legislative limit is decided by Congress on an annual basis and the national government debt cannot exceed this level. Should this ceiling come close to being breached without being raised, as it is now, then the federal government will have to act to immediately cut expenditure to prevent such a scenario until agreement is reached on raising the limit. Such "extraordinary measures" may include the temporary shutdown of certain government run institutions. The internal revenue service (IRS), for example, could stop responding to taxpayer questions by phone while the services and activities of some other bureaus could be halted completely.
The idea of an absolute debt ceiling in the US came into being in 1917. Prior to that, Congress was required to approve the issuance of every additional US Treasury Bond. By passing the debt ceiling law in 1917 it enabled the federal government to issue bonds without the approval of congress so long as the total issuance remained below the preset amount. Upon approval of the budget each year, Congress would then also pass legislation increasing the size of the debt limit to allow for the additional borrowings required. This of course was never meant to be used as a political tool to hold a government to ransom and would have been seen at the time as an adequate way for Congress to keep tabs on the federal government's debt, without the need to approve every additional issuance required. This in effect is where the Danish and US models diverge.
In 2010, after the financial crisis caused a large increase in government debt, the Danes reacted by doubling their existing debt ceiling, which was already far above the existing debt, to a level 3 times the debt required at the time. By doing this they ensured that there was no scope for the ceiling to limit the ability of government to function, as is currently at risk of happening in the US.
This is not the first time political stalemate has pushed things to the brink with no fewer than 17 funding gaps required to avoid the ceiling being breached between 1977 and 1996 alone. As recently as 2011 the US was on the brink of having to default as party politics pushed things to the wire, before a last minute temporary agreement increased the limit to a level sufficient for another couple of years. At that time the risk was deemed so great that S&P became the first credit rating agency to downgrade the US from the top ranking of AAA to AA+. Ironically, despite the downgrade, treasury yields fell as investors still flocked to the US as the safe haven (Although even S&P have questioned whether investors should pay attention to their ratings!).
The US debt ceiling currently stands at $16.7 trillion and most estimates believe this figure will be hit by mid-October. As a percentage of GDP, US debt is around 101%. Both of these figures could be taken as a reason to worry and indicate that potentially a ceiling and getting things in shape might not be a bad idea. However as mentioned in the article on austerity there is no substantial evidence to suggest that a debt ratio of this size is a restriction on the US economy. An increasing size of US debt, for now, is likely to be sustainable for the US due to it's ability to control and issue debt in it's own currency, nor is it having an inflationary impact at present with inflation continuing to remain well below the target 2% level. The US economy is also moving forward with it currently expected to grow at an annualized rate of 2.5% in the 4th quarter according to some estimates.
However Moody's Analytics chief economist predicts that a US government shutdown lasting just 2 weeks could reduce growth a 2.3% annualized rate, while a shutdown for 3-4 weeks could result in a 1.4 percentage point reduction to a rate of 1.1%. The common perception is that a last minute deal will take place before the US comes to a situation of default, but these figures indicate that the government shutdown required just to get to mid-October would in itself cause bad damage to an economy which is only just getting going. It seems very clear that for the sake of pushing, or not pushing, through the US healthcare bill, that politicians on both sides are willing to "play chicken" with the US and in effect the global economy. This in itself shows an irresponsibility of all the politicians involved. I'm not going to make a political statement on whether the Republicans or Democrats are right in their views on the Affordable Care Act, but differences on these issues should not be used to put a whole economy and economic recovery at risk. One can only hope that the politicians involved come to their senses.
Of crucial importance once any decision is reached is to remove the possibility of such a scenario happening again. This should be done by either removing the debt ceiling completely or, following Denmark's lead, acting in a bipartisan manner to set it at a level far beyond that which could effect the day to day running of government. There is still plenty of scope then for party politics in the US to disrupt the Affordable Care Act or any other piece of legislation should they so wish, but at least with an open ceiling, or with a high ceiling, such divergent issues won't impact the essential requirement of the Treasury to pay the bills which already exist.
"There is something rotten in the state of Denmark" remarked Marcellus to Horatio in the first Act of William Shakespeare's Hamlet. Perhaps if the bard was around today he would be tempted to look to Capitol Hill for inspiration, as modern era Denmark on this occasion has shown the way. Let us hope the US has the sense to follow.
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