# Debt limit ceiling

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I've heard this many times - but don't really understand a lot about it.

Is it a limit from borrowing from all potential sources, or a select few?

Wikipedia says the Govt. can borrow from the Treasury. I gather investors will buy shares in what the Govt. borrows, so they get a pay-out? Where does the Treasury get their money from? Is it simply printing the required amount?

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Astronuc
Staff Emeritus
I've heard this many times - but don't really understand a lot about it.

Is it a limit from borrowing from all potential sources, or a select few?

Wikipedia says the Govt. can borrow from the Treasury. I gather investors will buy shares in what the Govt. borrows, so they get a pay-out? Where does the Treasury get their money from? Is it simply printing the required amount?
The ceiling applies to all government borrowing, including inter-governmental borrowing, e.g., raiding the SS trust fund replacing the cash with IOUs of treasury notes.

It wouldn't apply to printing money.

JonDE
To add to what astronuc said, the treasury can add debt by selling US Treasury securities (trasuries is the short form). These are sold to either other government agencies (such as the social security trust fund) or to sources outside of the government, some common examples are individuals, businesses or foreign countries. These are essentially just loans in most aspects and pay interest based on market value.
http://en.wikipedia.org/wiki/United_States_Treasury_security

In order for the Treasury to sell securities, they must have approval to do so. In the current situation, which you are referring, the max amount of debt that congress has agreed the government can have, has been reached, and congress will need to increase the limit before further borrowing can occur.

As an aside, the Treasury is not normally responsible for printing money, that falls into the hands of the Federal Reserve, this is not normally responsible for financing the governments operations.

Astronuc
Staff Emeritus
Both the US Mint (responsible for coins) and the Bureau of Engraving and Printing (responsible for currency) are part of the US Dept. of Treasury.
Under the Coinage Act of 1873, the Mint became part of the Department of the Treasury. It was placed under the auspices of the Treasurer of the United States in 1981. Legal tender coins of today are minted solely for the Treasury's account.

. . . .
http://en.wikipedia.org/wiki/United_States_Mint

Bureau of Engraving and Printing
http://www.moneyfactory.gov/

As its primary function, the BEP prints billions of dollars - referred to as Federal Reserve Notes - each year for delivery to the Federal Reserve System. The Federal Reserve operates as the nation's central bank and serves to ensure that adequate amounts of currency and coin are in circulation. The BEP does not produce coins - all U.S. coinage is minted by the United States Mint.
Technically, the Federal Reserve distributes the currency - Federal Reserve Notes. In theory, the Department of the Treasury and Federal Reserve are mutually independent.

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russ_watters
Mentor

Yes, the media spun the Republicans as the inflexible ones, but the truth is that it was more like 90%-10%, with the Republicans giving almost everything. Obama's only compromise was on how much more to tax the rich and at what threshold. He was completely unwilling to even discuss, much less compromise other major aspects of the fiscal cliff negotiations that Republicans wanted to deal with:

-Spending cuts (despite saying he wanted a "balanced approach", the result was actually increased spending)
-Social Security/Medicare reform

In addition, what neither side discussed at all was the Social Security tax cut from last year expiring, which meant that everyone saw a tax increase, not just the rich.

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mheslep
Gold Member

Yes, the media spun the Republicans as the inflexible ones, but the truth is that it was more like 90%-10%, with the Republicans giving almost everything. Obama's only compromise was on how much more to tax the rich and at what threshold. He was completely unwilling to even discuss, much less compromise other major aspects of the fiscal cliff negotiations that Republicans wanted to deal with:

-Spending cuts (despite saying he wanted a "balanced approach", the result was actually increased spending)
-Social Security/Medicare reform
I think that Obama will remain inflexible on spending, cutting nothing through the end of his term. Every action to date indicates as much. So unless the House goes all in on the debt limit, the US will end up with a ~$20 trillion debt at the end of his term along with a ~$500 billion interest payment IF rates stay where they are. Will that outcome also be spun as the result of Republican intransigence?

BobG
Homework Helper

I think that Obama will remain inflexible on spending, cutting nothing through the end of his term.
I think this is a reasonable prediction. I doubt he will get away with no cuts at all, but concessions on spending will definitely be hard to get.

Health care reform is what Obama is banking his historical legacy on. History rarely remembers whether a President had budget deficits or surpluses - it remembers great social or diplomatic accomplishments, success or failure in war, etc.

He will eventually have to make some concessions, though, because the situation is just that bad when it comes to deficits. Balancing the budget may not be a priority, but he probably doesn't want to go down as the President that had the US economy completely collapse, either (like Hoover). He only needs to make enough spending cuts to kick the can four years further down the road.

I kind of felt like Romney had no great cause motivating him to run for President. To Romney, becoming President was the ultimate smiley face on his homework paper. But being shallow isn't all bad. Slipping in a President with no goals, one that just worked on whatever problems came across his desk, would give everyone a chance to catch up the maintenance a little bit.

russ_watters
Mentor

That's not really a prediction, but a paraphrase of Obama's stated (secondhand) intent:
"At one point several weeks ago," Mr. Boehner says, "the president said to me, 'We don't have a spending problem.' "...

Mr. Boehner confirms that at one critical juncture he asked Mr. Obama, after conceding on $800 billion in new taxes, "What am I getting?" and the president replied: "You don't get anything for it. I'm taking that anyway." http://online.wsj.com/article/SB10001424127887323482504578225620234902106.html?mod=googlenews_wsj Personally, I would call Obama's "balanced approach" comment from a few months ago a flat-out lie given that he sees no spending problem and therefore has no intention of accepting any spending cuts. Bob said: Health care reform is what Obama is banking his historical legacy on. History rarely remembers whether a President had budget deficits or surpluses - it remembers great social or diplomatic accomplishments, success or failure in war, etc. Uh huh: CNN said: On December 30, the president sat down for an interview with David Gregory on "Meet the Press." Gregory asked the president, "So what is your single priority of the second term? What is the equivalent to health care?" President Obama replied, "Well, there are a couple of things that we need to get done. I've said that fixing our broken immigration system is a top priority. I will introduce legislation in the first year to get that done." He went on to say, "The second thing that we've got to do is to stabilize the economy and make sure it's growing." During his first term in office, coming off "the worst recession since the Great Depression," to use the president's own words, it appeared to many that he prioritized Obamacare over the economy. Now it appears that the economy, and all that goes along with it, like the ever-growing national debt, will again play second fiddle, this time to immigration reform. If priorities are any reflection of politics, it appears the president is more concerned with what he regards as historic, landmark legislation to build his legacy, rather than the economic well-being of the nation.... http://www.cnn.com/2013/01/10/opinion/bennett-obama-debt-celing/index.html?hpt=op_bn6 Last edited: Astronuc Staff Emeritus Science Advisor I think that Obama will remain inflexible on spending, cutting nothing through the end of his term. Every action to date indicates as much. So unless the House goes all in on the debt limit, the US will end up with a ~$20 trillion debt at the end of his term along with a ~$500 billion interest payment IF rates stay where they are. Will that outcome also be spun as the result of Republican intransigence? Unfortuantely it appears that Obama is digging in his heals. He essentially said he will not negotiate on the debt ceiling, which is inappropriate. This is where we are today http://www.treasurydirect.gov/NP/BPDLogin?application=np 01/10/2013$11,577,361,703,183.51 Debt Held by the Public (foreign/domestic)
$4,855,330,426,327.33 Intragovernmental Holdings (held by US government depts.)$16,432,692,129,510.84 Total Public Debt Outstanding

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

Interest paid 2012 = $359,796,008,919.49 Interest paid 2011 =$454,393,280,417.03

http://www.treasurydirect.gov/govt/govt.htm

It's time to stop kicking the bucket down the road!

It seems it's never 'the right time' to deal with the burgeoning debt. The Federal government's health care program would work, ONLY IF, it actually reduced health care spending, or increased revenue to cover increased expenses. It does not work if it is only a subsidy to the current healthcare system.

Health insurance (like any insurance) only work when a fraction of the population needs to use it. There is a presumption that a fraction of folks will need to be paid. At some point, it stops being insurance and becomes a subsidy, and if the system pays out more than it takes in, then at some point it collapses.

It is absurd to think that the government can accumulate debt at the current rate! The current situation is unsustainable.

He went on to say, "The second thing that we've got to do is to stabilize the economy and make sure it's growing."
Even though the economy is growing (barely), the rate is only about 2%. The government debt is growing at close to 6% or more. The US economy averages between 3 to 4% per year on average. The talk should be about eliminating the deficit - not reducing the deficit.

My only concern is why are people saying Obama compromised severely and that he should have stuck with his election pitch? From those two links and a bit of other research, it seems to me that the tax rates are high as it is. Am I not getting something?
I think that people are saying that Obama compromised severely because given his campaign rhetoric he's compromised severely.

You might say that tax rates (for the rich) are high as it is. But they remain quite a bit lower than past rates.

If the debate is about whether tax rates for the rich should be increased, then my opinion is that they should, that that wouldn't affect the general economy at all, and that that's a necessary step toward reducing the deficit and debt.

Will that happen? No idea. My guess is that it probably won't.

Unfortuantely it appears that Obama is digging in his heals. He essentially said he will not negotiate on the debt ceiling, which is inappropriate.

This is where we are today
01/10/2013
$11,577,361,703,183.51 Debt Held by the Public (foreign/domestic)$ 4,855,330,426,327.33 Intragovernmental Holdings (held by US government depts.)
$16,432,692,129,510.84 Total Public Debt Outstanding http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Interest paid 2012 =$359,796,008,919.49
Interest paid 2011 = $454,393,280,417.03 http://www.treasurydirect.gov/govt/govt.htm It's time to stop kicking the bucket down the road! It seems it's never 'the right time' to deal with the burgeoning debt. The Federal government's health care program would work, ONLY IF, it actually reduced health care spending, or increased revenue to cover increased expenses. It does not work if it is only a subsidy to the current healthcare system. Health insurance (like any insurance) only work when a fraction of the population needs to use it. There is a presumption that a fraction of folks will need to be paid. At some point, it stops being insurance and becomes a subsidy, and if the system pays out more than it takes in, then at some point it collapses. It is absurd to think that the government can accumulate debt at the current rate! The current situation is unsustainable. Even though the economy is growing (barely), the rate is only about 2%. The government debt is growing at close to 6% or more. The US economy averages between 3 to 4% per year on average. The talk should be about eliminating the deficit - not reducing the deficit. Excellent post imo. Problem is that what should be done is probably not what's going to be done. Projections based on current status quo(s) are alarming. I don't see any solutions that can be realistically expected to be implemented. Here's an old post of mine explaining the debt ceiling: I thought it might be helpful to explain the whole debt ceiling issue. The US government takes in a certain amount in taxes, and then pays out a much higher amount in spending. To pay for the difference, it takes out loans, AKA Treasury bonds, from investors and foreign countries. Like any loan, you have to pay interest, but our finances are so bad that we borrow even the money we need to pay the interest on the loans we already have! The problem we're having now is that there is a law which puts a cap on the total amount we can owe at once, and our debt is expected to hit it on August 2. At that point we can only spend as much as we take in, which is a tough thing to achieve overnight when we borrow 40 cents for every dollar we spend. So what do we cut? If we skip some interest payments, then lenders like China may start charging us higher interest rates, which could worsen our economic situation. Halting defense contractor payments or soldier pay would place an undue burden on our troops, and delaying Medicare payments would lead to doctors turning away seniors. But if we pay everything I listed, we'll have almost nothing for everything else. Say goodbye to border agents, federal housing, welfare, prison security, and all the other services of Uncle Sam. Finally, there's Social Security, which is kind of up in the air. Many people believe there is a vault of cash somewhere called the trust fund, but sadly that's not true. As payroll taxes come in, the government immediately spends the money on whatever it wants, and then just sticks Treasury bonds in the trust fund. In normal circumstances those bonds are sold on the open market to pay for benefits, but after we hit the debt ceiling we're not allowed to borrow any more money. So seniors may not get their checks on August 3. All in all, it's a terrible situation, so we should hope a deal is reached soon to raise the debt ceiling. mheslep Gold Member I think this is a reasonable prediction. I doubt he will get away with no cuts at all, but concessions on spending will definitely be hard to get. .... He will eventually have to make some concessions, though, because the situation is just that bad when it comes to deficits. ... Why *must* Obama make cuts? Yes the deficit is ridiculously out of hand. But that has no legal force on the President. Given the current federal officer holders, there is only one constitutional or political instrument in the US capable of forcing any cuts past the piddling sequester agreed on last year, aside from one: the debt ceiling in the House. The last debt ceiling vote had some leverage on Obama because of the then pending election. As others have already posted Obama has stated he intends to suffer no negotiations on the debt ceiling. Unless the House Republicans are willing to go all in on government shut down (I think they should, but will not), then I expect there will indeed be no negotiation. mheslep Gold Member ... I would call Obama's "balanced approach" comment from a few months ago a flat-out lie given that he sees no spending problem and therefore has no intention of accepting any spending cuts. ... Agreed. Drakkith Staff Emeritus Science Advisor Realistically, where could cuts to the budget come from? IE what programs/organizations would need to have their funding reduced? I am of the opinion that one cannot simply keep increasing taxes as more and more programs are brought online and their funding increased. That seems to my mostly uneducated mind to be a spiral of doom. Or is that one of the main sources of disagreement, on where to cut? russ_watters Mentor Realistically, where could cuts to the budget come from? Everywhere. I'd start with an across-the board cuts in everything. Pulling a number out of the air: 10%. That's about$130 Billion a year. Then I'd make automatic budget increase amounts .5% below previous years' GDP increase for at least 5 years after that (or until we reach a target debt-to-gdp ratio). That way, the trajectory stays below rising revenue's.

Why 10% across the board?
1. It is easy. No need to argue, as every dept feels the pain equally. That avoids fierce fights over specific programs.

2. The value of those cuts would bring some "balance" to federal debt reduction policy -- depending on if you include the SS tax increase in the calculus or not.

3. The government never suffers during recessions. Normal companies lay workers off when they feel the squeeze during recessions. This is actually a positive thing. It provides an opportunity to cut poor performers, motivating the workers to work harder and management to make their businesses more efficient. Much government bloat/waste comes from never having to actually care about principles of economics. The government and government workers would benefit from such a lesson. I suspect that a 10% cut could be done with little or no impact in services because of the vast waste that exists.

Entitlement reform is still a bigger issue, but that would be a nice start.

By the way, the fiscal cliff deal included the following revenue increases:
1. Social Security Tax: $160 Billion a year 2. Income tax:$60 Billion a year

These are gleaned from several sources. It is difficult doing the accounting because the CBO does their baseline predictions based on existing tax law, which means the fiscal cliff deal was calculated as a massive tax cut, not a small tax increase. The same problem existed for the sequestration: even though nothing happened, the CBO calls it a massive spending increase because the spending decrease that was written into law didn't happen. The CBO is required to use such logic, even though we all knew that at least the spending cuts were just a gamesmanship tactic to begin with (caveat: The one part I wasn't sure about was that I considered it possible that Obama did want all of the Bush tax cuts to expire.).

http://ctj.org/pdf/fiscalcliffdealrevenueimpacts.pdf
http://www.cbo.gov/sites/default/files/cbofiles/attachments/American Taxpayer Relief Act.pdf

mheslep
Gold Member

A point on the new revenues: unlike spending, those figures only hold if the economy continues as is and does not slow down. Spending on the other hand will increase if the economy turns down (more unemployment insurance, more food stamps, etc)

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we should hope a deal is reached soon to raise the debt ceiling
To what end?

I've heard this many times - but don't really understand a lot about it.

Is it a limit from borrowing from all potential sources, or a select few?

Wikipedia says the Govt. can borrow from the Treasury. I gather investors will buy shares in what the Govt. borrows, so they get a pay-out? Where does the Treasury get their money from? Is it simply printing the required amount?
The government gets most of its money from taxes and the almost all of the rest from selling bonds through the Federal Reserve. Those bonds are the debt. The money-creation thing is complicated.

The debt ceiling thing is purely a political maneuver. Congress passes a budget which REQUIRES the executive to spend large sums of money, considerably more than the income. Congress orders the government to run at a (very large) deficit. Congress then denies the executive the power to borrow, which is the only reasonable way to finance the deficit.

Default would be a catastrophe. So essentially the Republican House threatens to force a catastrophe unless certain measures are passed into law. The hope is to avoid the blame by relying on public ignorance of Constitutional law.

In short, it is a form of extortion. "Nice little economy you got's dere. Would be too bad if something was to happen to it!"

Astronuc
Staff Emeritus
Something to ponder on the debt and chronic deficits:

Looking for someone to blame? Congress is a good place to start

Politicians, as I have often said, are the only people in the world who create problems and then campaign against them.
According to the OS, "(This column originally ran in the Orlando Sentinel on March 7, 1995. Former columnist Charley Reese retired from the Sentinel 10 years ago. His final column ran on July 29, 2001.)"

Back then the debt was only ~$4 trillion. Now it's close to$16 trillion.

Realistically, where could cuts to the budget come from?
Well, realistically (or maybe cynically) the cuts can’t come from anywhere, because anywhere you cut you’re cutting someone’s money.

But the best way to think of (edit: US) government spending is that it is largely made up of three things (from largest to smallest): transfer payments to the elderly, defense spending, and transfer payments to the poor. That’s the vast majority of spending, with things like education, road building etc. being a fairly small share or the total. (However, one note: most of the transfers to the elderly are in two programs, social security and medicare; the transfers to the poor are, with the exception of medicare, made up of many smaller programs).

You won’t balance the budget cutting small dollars, so you’re going to have to make significant, painful cuts in those three groups – defense, transfers to the elderly, and transfers to the poor. These are extremely popular programs, and are very difficult to reduce.

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SixNein
Gold Member

Unfortuantely it appears that Obama is digging in his heals. He essentially said he will not negotiate on the debt ceiling, which is inappropriate.
He should have dug in his heels the last time we had this discussion. By entertaining the political tactic last time, he ensured we'd have the fight over the debt limit again.

This is where we are today
01/10/2013
$11,577,361,703,183.51 Debt Held by the Public (foreign/domestic)$ 4,855,330,426,327.33 Intragovernmental Holdings (held by US government depts.)
\$16,432,692,129,510.84 Total Public Debt Outstanding

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
And now you can minus U.S. Holdings of Foreign Securities.

It's time to stop kicking the bucket down the road!
.
.
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It is absurd to think that the government can accumulate debt at the current rate! The current situation is unsustainable.
Our current rate of accumulation is mostly driven by the recession we experienced, and it will drop on its own as the economy reaches full employment.

I pretty much agree with The Economist on it's recent take here.

These are gleaned from several sources. It is difficult doing the accounting because the CBO does their baseline predictions based on existing tax law, which means the fiscal cliff deal was calculated as a massive tax cut, not a small tax increase.
The CBO also does alternative scenario calculations; at times, that's the point of doing the baseline, so they can trace their assumptions in their alternative scenarios and how they differ from law.

For instance, located here:

Relative to what would have occurred if most tax and spending policies that were in effect in 2012 were continued, this legislation will reduce budget deficits in coming years.
Instead of comparing legislation with the law that was in effect at the end of 2012, one might also compare it with the tax and spending policies that were in effect in 2012 (or, in the case of the AMT, in 2011). Many of those policies were scheduled to expire at the end of December—but suppose instead they had been continued. If so, revenues would have been noticeably less than they would have been under the laws scheduled to be in effect in 2013 and beyond.
If you follow the links provided, you may find they did the accounting for you.

SixNein
Gold Member

Unless the House Republicans are willing to go all in on government shut down (I think they should, but will not), then I expect there will indeed be no negotiation.
You seem to be confusing the debt ceiling issue with a budget-induced (or lack-there of) government shutdown. This is in a completely different galaxy. If the debt ceiling isn't raised, the government essentially tells the world that it will no longer be participating in the financial markets, and it will not honor any prior obligation.

I honestly don't know what would happen after such an event, and I don't believe anyone else does either. The world market operates by and large off of the US financial system, and for the government to just literally drop it and walk away....

I just don't see an outcome that wouldn't destroy the US and much if not all the world economy.

And what kind of political system do we end up with where one side threatens the other with economic disaster unless it gets what it wants?

And what kind of political system do we end up with where one side threatens the other with economic disaster unless it gets what it wants?
A dysfunctional one.