Debt Ceiling Fear Mongering

Alan Blinder, former vice chairman of the Federal Reserve, and co-author of a very popular Economics college textbook, believes that although the fiscal cliff was serious, the “debt ceiling is scarier.” Allowing the economy to go over the fiscal cliff would have resulted in a 4.5 percent contraction of GDP. The upcoming debt ceiling impasse could shrink GDP by more than 6 percent, force a 26 percent reduction in government spending, and a “swift descent into recession.” Blinder said that “At current rates of spending and taxation, federal receipts cover less than 74 percent of federal outlays.” (Wall Street Journal, The Debt Ceiling is Scarier than the Fiscal Cliff, January 14, 2013)

The federal government just increased taxes on Americans who earn an income. The touted rich, who “must pay their fair share,” were barely touched because these new taxes do not include wealth, just earned income. Texas, Louisiana, Florida have balanced their budgets without raising taxes, they just cut spending. Illinois and California, who increased taxes, are still following the federal government’s reckless spending formula.

Our President had promised to cut the budget deficit in half during his first term and then balance the budget – he did neither. On the contrary, he increased the national debt, the “mess” he keeps reminding us that he had inherited from his predecessor, from $6 trillion to over $16 trillion in four years.

Not raising the debt ceiling again would force the federal government to operate within the means of revenues, forcing cuts overnight and the choice which bills to pay and which to delay.

There is another option to the quandary of sequestration in two months when automatic cuts of 9 percent will be made in the military. We could do away with the debt ceiling altogether as the Secretary of Treasury Tim Geithner had suggested and the Chairman of the Federal Reserve, Ben Bernanke, echoed, “Get rid of the debt ceiling, it has no practical value.”

Not having the debt ceiling, which is periodically raised anyway, unless a Republican President wants to start a war, in which case, it is fine to vote against raising the debt ceiling, is like giving a credit card to a teenager without a credit limit.

What credit card company would raise the credit limit to someone who maxed out their card to the tune of $100,000 when they only earn $30,000 a year?

The debt limit or ceiling is not something new. “Congress created a statutory debt limit in the Second Liberty Bond Act of 1917.” What is new is the extraordinary level of government outlay in such a short period of time (4 years).  In the absence of a budget, the government has been operating on continuing resolutions. If the sequestration does kick in, the problem becomes compounded by the fact that the government has been spending money since October 2012, on the premise that the debt ceiling will be raised again in March 2013 and the sequestration will not be necessary.

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies…. Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” (Sen. Obama’s Floor Speech, March 20, 2006)

Senator Obama was then urging Congress not to increase the debt ceiling to $9 trillion. The government statutory debt limit has now reached $16.394 trillion as of December 31, 2012.

The federal debt is debt held by the public, foreign and domestic, and by government agencies, also known as intragovernmental debt. The federal government borrows money because of budget deficits (spending more than its yearly revenues) and because of investments of federal government account surpluses in Treasury securities, as required by law.

The Treasury can employ “extraordinary measures” to avoid exceeding the debt limit such as a “debt issuance suspension period.”  The Treasury suspends investments in the Civil Service Retirement and Disability Trust Fund, Postal Service Retiree Health Benefit Fund, and the Government Securities Investment Fund of the Federal Thrift Savings Plan. Geithner established a debt issuance suspension period until February 28, 2013. (CRS, pp. 3-4)

Department of Treasury actions were taken previously in 1985, 1995-1996, 2002-2003, 2009, 2011, and 2012 in order to postpone reaching the debt limit. (CRS, pp. 4-6)

After the Budget Control Act of 2011 was passed on August 2, 2011, the debt limit enacted then was reached on December 31, 2012. Using “extraordinary measures” will buy additional time until February 28, 2013. (Congressional Report Service, “Reaching the Debt Limit: Background and Potential Effects on Government Operations,” Mindy R. Levit, Clinton T. Brass, Thomas J. Nicola, Dawn Nuschler, January 4, 2013)

The intragovernmental debt is debt issued primarily to trust funds such as Social Security, Medicare, and Unemployment Compensation. When a trust fund “invests” in U.S. Treasury securities, it lends money to the rest of the government. Treasury periodically pays interest on the special securities held in a government account. The revenues exchanged for these securities go into the General Fund of the Treasury and is then spent for any government outlay.

What if the debt limit is reached and not raised? Perhaps bills will be paid in the order in which they are received; bills to be paid will be prioritized; other bills would go into an unpaid and delayed bills category. Such decisions would be similar to those made by everyday Americans who have to live on a limited budget and within their means. Would prioritizing be a glaring example of U.S. government’s failure to meet its commitments? GAO said in 1985 that the “Treasury is free to liquidate obligations in any order it finds will best serve the interests of the United States.” But the Treasury thinks that all obligations have equal footing according to the law.

It is fear mongering to say that the U.S. cannot pay its bills if the debt ceiling is not raised again. “The Treasury has sufficient resources to liquidate all obligations arising from discretionary and mandatory (direct) spending, including interest payments on the debt.” (CRS, p. 10)

Delaying payments to vendors, contractors, beneficiaries, other governments, and employees could take place. Congress passed P.L. 104-121 to preclude the use of Social Security and Medicare Trust Funds for debt management, except for payments of benefits and administrative expenses of those programs.

CBO said in 1995, “Failing to raise the debt ceiling would not bring the government to a screeching halt the way that not passing appropriations bills would. Employees would not be sent home, and checks would continue to be issued. If the Treasury was low on cash, however, there could be delays in honoring checks and disruptions in the normal flow of government services.” (CRS, p. 11)

Sequestration may furlough government employees for up to 22 days. The military is exempt until October 1, 2013. The Joint Chiefs of Staff have sent a letter to Congressional leaders this week expressing their concern that not passing a 2013 defense budget and sequestration will create a hollow force.

A government default will affect the economy and the public welfare: salaries and wages of employees, social security benefits, civil service retirement, services and supplies in general. The full faith and credit of the U.S. will be downgraded further. It is unclear how the financial markets will be affected. Some economists are concerned about the out-of-control federal debt but warn of significant repercussions if the debt limit is not raised. “Suggesting that the United States might default on its debt is factually wrong and shameful behavior on the President’s part,” said Heritage’s J. D. Foster. The “threat of default,” as Obama called it, is a red herring.” The Treasury has “far more than enough funds to pay all interest as it comes due.”(Amy Payne, Heritage Insider, January 15, 2013)

Nouriel Roubini said that United States would not have to pay higher borrowing costs if Congress does not raise the debt ceiling. In the face of global fear, other nations usually dump the yen and the euro and buy dollars. If China avoids the dollar, the emerging markets would not want their currencies to appreciate and lose market share to China, therefore the best move would be to buy Treasury securities and the dollar. (Moneynews, Roubini: U.S. Still Safe Despite Debt Ceiling Fight, Michael King, January 15, 2013)

It would not hurt if banks, which are too big to fail and have become extremely political and not so pro-America in their business stance, would be split up into smaller entities.

It is not a good idea to raise the debt ceiling again without balancing the budget. Because the main stream media does not report unbiased news anymore, it is hard for most Americans to understand that they are being held hostage to a fear of economic Armageddon if politicians do not get their outrageous spending wishes, some of which are shamelessly included in the hurricane Sandy relief package.