US Debt Ceiling Explained

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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.
 
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  • #2
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yeah, well, the problem is that we don't have to borrow. we are a sovereign nation, and we can just print the dollars without debt instead of printing the dollars and also paying interest on those dollars.

https://www.youtube.com/watch?v=_ruYfR-Ht1o

tell me, where do you think the Federal Reserve got $16 Trillion dollars to bail out foreign banks?

http://www.washingtonpost.com/busin...-of-interest/2011/07/21/gIQAJbbnSI_story.html

does this mean we now own europe the way some people think china owns us?
 
  • #3
MarcoD


yeah, well, the problem is that we don't have to borrow. we are a sovereign nation, and we can just print the dollars without debt instead of printing the dollars and also paying interest on those dollars.
...
does this mean we now own europe the way some people think china owns us?
It's an interesting idea, but it won't solve the fiscal deficit problem. In essence, it is a return to 'golden' coins; a thing you can trade for goods which is state issued with the difference that it wouldn't have an intrinsic value. You would think that governments then would be forced to run a fiscal surplus, but in the end, they will just issue loans again. I.e., nothing would change.

The US doesn't own Europe; netto, the US is a significant importer of goods, you run a large trade deficit. That means that lots of dollars end up abroad, some in Europe, some in China. Europe and China don't own the US, they own paper.

Mostly, with dollars which ended up in Europe, US treasury bonds and companies are bought. The latter means that ownership of firms is transferred to foreigners. That's not a bad thing, in the end, I think it means that US workers keep their jobs, and usually the owner ends up immigrating to the US, or companies are just merged into international clusters. Again, netto, nothing changed except that goods were given to the US at no cost.

(The only thing which changes for the US as more money accumulates abroad is that it becomes more difficult to buy products, like oil. I.e., oil prices go up.)
 
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  • #4
256bits
Gold Member
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yeah, well, the problem is that we don't have to borrow. we are a sovereign nation, and we can just print the dollars without debt instead of printing the dollars and also paying interest on those dollars.
So you will have a larger money supply chasing goods and a proper chance of resulting inflation. Would you end up like Zimbabwe and hyperinflation? Would you want to? Why would anyone want to work if money is "free".
 
  • #5
100
1
It's an interesting idea, but it won't solve the fiscal deficit problem. In essence, it is a return to 'golden' coins; a thing you can trade for goods which is state issued with the difference that it wouldn't have an intrinsic value. You would think that governments then would be forced to run a fiscal surplus, but in the end, they will just issue loans again. I.e., nothing would change.

The US doesn't own Europe; netto, the US is a significant importer of goods, you run a large trade deficit. That means that lots of dollars end up abroad, some in Europe, some in China. Europe and China don't own the US, they own paper.

Mostly, with dollars which ended up in Europe, US treasury bonds and companies are bought. The latter means that ownership of firms is transferred to foreigners. That's not a bad thing, in the end, I think it means that US workers keep their jobs, and usually the owner ends up immigrating to the US, or companies are just merged into international clusters. Again, netto, nothing changed except that goods were given to the US at no cost.

(The only thing which changes for the US as more money accumulates abroad is that it becomes more difficult to buy products, like oil. I.e., oil prices go up.)
it's got nothing at all to do with gold.

So you will have a larger money supply chasing goods and a proper chance of resulting inflation. Would you end up like Zimbabwe and hyperinflation? Would you want to? Why would anyone want to work if money is "free".
if you get rid of taxes, and have no real economy, then that could happen. it's entirely a matter of how much money you put into circulation. don't try to use it as an excuse to get to something for nothing, and that won't happen.

problem is, congress is overspending now, but we're also paying interest on debt that only makes the problem worse and enriches the wealthy for no good reason as they provide no real service in exchange for us giving them money.
 
  • #6
talk2glenn
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!
This simply is not true, and is more or less the definition of bankruptcy. Interest on outstanding debt costs the Treasury ~$40B a month, against ~$200B in revenues.
 
  • #7
1,039
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As a recipient of the GI Bill, to fund my education, this has me pretty worried. I don't even know if I will get paid this month (which is money that I have essentially already earned). Thanks for the information, I have admittedly not followed these events until I realized that it could effect me personally.
 
  • #8
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This simply is not true, and is more or less the definition of bankruptcy. Interest on outstanding debt costs the Treasury ~$40B a month, against ~$200B in revenues.
I didn't mean that it's impossible to pay interest without borrowing, I was talking about our current practice. Starting at the beginning of the month, we pay for things out of revenues until we're out of cash. Then we use borrowed money for everything else. By the time we have to pay interest coupons, we usually have run out of revenue. Of course, once we hit the debt ceiling the Treasury Department will probably change the schedule of our payments, so that interest comes before everything else.
 
  • #9
1,545
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As a recipient of the GI Bill, to fund my education, this has me pretty worried. I don't even know if I will get paid this month (which is money that I have essentially already earned). Thanks for the information, I have admittedly not followed these events until I realized that it could effect me personally.
Thank you for your service. This is the rough order that people expect Obama to prioritize payments: interest on the debt, Social Security, soldier pay, veterans benefits, defense contractors, Medicare payments, and then everything else. So you're relatively likely to be paid.
 
  • #10
talk2glenn
yeah, well, the problem is that we don't have to borrow. we are a sovereign nation, and we can just print the dollars without debt instead of printing the dollars and also paying interest on those dollars.
This is more or less the worst idea anyone could seriously propose. We will sooner default on the debt than try printing our way out.

tell me, where do you think the Federal Reserve got $16 Trillion dollars to bail out foreign banks?
The Fed has a balance sheet - it does not print money. That is the exclusive domain of the Treasury. What the Fed can do is borrow against or sell book assets, to raise working capital. Its stakeholders (the member banks) are the primary providers of working Board capital.
 
  • #11
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This is more or less the worst idea anyone could seriously propose. We will sooner default on the debt than try printing our way out.
defaulting seems to be unconstitutional. the worst idea is that we ever started borrowing in the first place. but if for some reason we do need to spend more than we take in, i think it is better to reduce the purchasing power of the dollar directly than to dilute the dollar, and then also owe debt on top of that.

The Fed has a balance sheet - it does not print money. That is the exclusive domain of the Treasury. What the Fed can do is borrow against or sell book assets, to raise working capital. Its stakeholders (the member banks) are the primary providers of working Board capital.
are you telling me that the federal reserve bailed out the banks by borrowing money from the banks, to then give it back to the banks?

i'm also wondering if you can explain to me who, if not the Fed, creates money out of thin air for http://en.wikipedia.org/wiki/Quantitative_easing" [Broken] doesn't have to exist as a printed currency. it's still there electronically, and when the banks use fractional reserve lending, they add even more to the money supply.
 
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  • #12
talk2glenn
i'm also wondering if you can explain to me who, if not the Fed, creates money out of thin air for quantitative easing. created money doesn't have to exist as a printed currency. it's still there electronically, and when the banks use fractional reserve lending, they add even more to the money supply.
The funds for quantitative easing aren't "created" in the strictest sense - they are taken from the out-of-circulation asset stock held by the reserve, and injected into the circulated money supply, either by purchasing non-dollar assets, or lowering the reserve requirements, or some combination of both.

The Fed has numerous tools with which it controls the money supply. The power to issue and/or retire currency is not one of them.
 
  • #13
SixNein
Gold Member
42
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On the topic of who prints money:

Federal Reserve Notes are authorized by Section 411 of Title 12 of the United States Code and are issued to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System.[2] The notes are then put into circulation by the Federal Reserve Banks.[3] Once the notes are put into circulation, they become liabilities of the Federal Reserve Banks[4] and obligations of the United States.

Federal Reserve Notes are legal tender, with the words "this note is legal tender for all debts, public and private" printed on each note. (See generally 31 U.S.C. § 5103.) They have replaced United States Notes, which were once issued by the Treasury Department. Federal Reserve Notes are backed by the assets of the Federal Reserve Banks, which serve as collateral under Federal Reserve Act Section 16. These assets are generally Treasuries which have been purchased by the Federal Reserve through its Federal Open Market Committee in a process called monetizing the debt. (See Monetization.) This monetized debt can increase the money supply, either singly with the issuance of new Federal Reserve Notes or multiply with the creation of debt money through the fractional-reserve banking of the Federal Reserve System.

http://en.wikipedia.org/wiki/Federal_Reserve_Note
 
  • #14
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once again, printed paper notes are not the only money. most of it is electronic. the treasury prints the paper and mints the coins.
 
  • #15
FlexGunship
Gold Member
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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.
Minor correction: the U.S. has already incurred the debt to push it past the "ceiling," that is to say, the money is already spent. However, in order to add those debts to the list of "payees" the debt ceiling has to be raised.

Even if the U.S. went on an instant "spend as much as we take in" diet, the debt ceiling would still have to be raised to accommodate existing debt obligations.

A small point in detail, but still important. It's like we already swiped the credit card, took home the new vacuum cleaner, and then realized that we're at $5,120 out of our $5,000 credit limit and NOW we're discussing if we need to raise our credit limit.
 
  • #16
1,545
10
Minor correction: the U.S. has already incurred the debt to push it past the "ceiling," that is to say, the money is already spent. However, in order to add those debts to the list of "payees" the debt ceiling has to be raised.

Even if the U.S. went on an instant "spend as much as we take in" diet, the debt ceiling would still have to be raised to accommodate existing debt obligations.

A small point in detail, but still important. It's like we already swiped the credit card, took home the new vacuum cleaner, and then realized that we're at $5,120 out of our $5,000 credit limit and NOW we're discussing if we need to raise our credit limit.
No, that's not true. Every dollar we spend has to come from somewhere. It either comes from money we have already collected in taxes, or money we have already borrowed through Treasury bonds. Every dollar we borrow is immediately added to a number called the "Public Debt Subject to Limit". We are only allowed to engage in borrowing if this number is less than the debt ceiling. So no, our debt has not exceeded the debt ceiling, and we don't need to raise the debt ceiling "to accommodate existing debt obiligations".

The US government spends its money on two things: 1. interest on Treasury bonds and 2. everything else. The first is associated with "money that is already spent", but the second isn't. Once we hit the debt ceiling, will be able to pay everything in category 1 and some of category 2, essentially forever. A "spend as much as we take in diet" is sufficient to not default on our debt.
 
  • #17
MarcoD
it's got nothing at all to do with gold.
I said it is like returning to 'golden' coins without any intrinsic value. It was a polite manner of saying that it won't work.

I am sorry, but the guy has no idea what he is talking about, is unemployed, and is just posting videos to make some money. Don't buy into it.

I have listened to two idea's of him:

1) Let's just print money without any intrinsic or other value. Who'ld want it? Golden coins had intrinsic value. You also have fiat money, and some other forms. All forms of money are backed by a manner which gives the currency value. It really is a no-brainer that this [his proposal] cannot work.

2) Let's use copper coins. That's a return to commodity money. Will it solve any problem: no! It is not a problem of which type of currency the US uses to create a debt hole. The debt hole is the problem. [And that hole cannot magically disappear, unless for default.]

Don't post stuff of the guy again, unless just for laughs. It is a scam.
 
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  • #18
FlexGunship
Gold Member
369
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No, that's not true.
I understand the nature of the debt ceiling is complicated. Let me further clarify: we need to raise the debt ceiling to honor PAST debt obligations, not future ones. If you're not familiar with Geithner's letter to republicans, then you should read it. It will illuminate a lot of dark areas. Don't feel bad, even Senate Republicans get confused by it.

Link: http://www.treasury.gov/initiatives/Documents/DLDeMint062811.pdf The quote below is taken directly from his letter.

Timothy Geithner said:
The debt limit applies to past decisions of Congress. Increasing the debt limit is necessary to allow the United states to honor obligations previously authorized and appropriated by Congress.

[...]

Increasing the limit does not increase the obligations we have as a Nation; it simply permits the treasury to fund those obligations Congress has already established.
(Emphasis is in Geithner's ORIGINAL letter, I did not add emphasis.)

To put it simply, we have out spent the debt ceiling, and now the bill is due. You either raise the ceiling to pay your past obligations, or you default. Simply going on a budgetary diet doesn't solve anything; it's too late. We have passed that point.
 
  • #19
100
1
I said it is like returning to 'golden' coins without any intrinsic value. It was a polite manner of saying that it won't work.

I am sorry, but the guy has no idea what he is talking about, is unemployed, and is just posting videos to make some money. Don't buy into it.

I have listened to two idea's of him:

1) Let's just print money without any intrinsic or other value. Who'ld want it? Golden coins had intrinsic value. You also have fiat money, and some other forms. All forms of money are backed by a manner which gives the currency value. It really is a no-brainer that this [his proposal] cannot work.

2) Let's use copper coins. That's a return to commodity money. Will it solve any problem: no! It is not a problem of which type of currency the US uses to create a debt hole. The debt hole is the problem. [And that hole cannot magically disappear, unless for default.]

Don't post stuff of the guy again, unless just for laughs. It is a scam.
our current currency doesn't have any intrinsic value. our current currency is a fiat currency. the US dollar is not backed by gold, silver, copper, or anything else. just the "faith and credit" of the US government. in the past, this country has used currency backed by gold, silver, and fiat currencies backed by nothing at all. all have functioned as currencies, but currencies backed by silver or gold are sensitive to hoarding and groups trying to corner the market.

now, if you can prove to me that the US dollar is backed by some intrinsic object, i'm all ears.
 
  • #20
100
1
I understand the nature of the debt ceiling is complicated. Let me further clarify: we need to raise the debt ceiling to honor PAST debt obligations, not future ones. If you're not familiar with Geithner's letter to republicans, then you should read it. It will illuminate a lot of dark areas. Don't feel bad, even Senate Republicans get confused by it.

Link: http://www.treasury.gov/initiatives/Documents/DLDeMint062811.pdf The quote below is taken directly from his letter.



(Emphasis is in Geithner's ORIGINAL letter, I did not add emphasis.)

To put it simply, we have out spent the debt ceiling, and now the bill is due. You either raise the ceiling to pay your past obligations, or you default. Simply going on a budgetary diet doesn't solve anything; it's too late. We have passed that point.
i believe he is talking about spending "obligations" there, not actual debts. those spending "obligations" can simply be annulled by additional legislation.
 
  • #21
1,545
10
I understand the nature of the debt ceiling is complicated. Let me further clarify: we need to raise the debt ceiling to honor PAST debt obligations, not future ones. If you're not familiar with Geithner's letter to republicans, then you should read it. It will illuminate a lot of dark areas. Don't feel bad, even Senate Republicans get confused by it.

Link: http://www.treasury.gov/initiatives/Documents/DLDeMint062811.pdf The quote below is taken directly from his letter.



(Emphasis is in Geithner's ORIGINAL letter, I did not add emphasis.)

To put it simply, we have out spent the debt ceiling, and now the bill is due. You either raise the ceiling to pay your past obligations, or you default. Simply going on a budgetary diet doesn't solve anything; it's too late. We have passed that point.
I agree with Proton Soup. When Geithner says "obligations previously authorized and appropriated by Congress", he means spending. Every year, Congress passes an appropriations bill, detailing line by line how much money should be spent every month and on what. So Geithner is saying that raising the debt ceiling will allow the government to spend money that Congress wanted it to spend. It's not like the money has already been spent and now has to be paid for.

It's just like a family which has made plans to go to the movies once a month, and typically pays for it by adding onto their credit card. But if they hit their credit limit they may no longer be able to afford that trip to the movies anymore. In other words, they will have stopped an expenditure they had previously decided to make every month.
 
  • #22
FlexGunship
Gold Member
369
8
i believe he is talking about spending "obligations" there, not actual debts. those spending "obligations" can simply be annulled by additional legislation.
I agree with Proton Soup. When Geithner says "obligations previously authorized and appropriated by Congress", he means spending.
That would be nice, because it would make the whole sticky issue a lot simpler, but again, that's not true. In fact, if that were true, then we wouldn't default on any debt obligations, we would simply have to stop spending. There seems to be intentional misinformation circulating that this is an option.

A quote from senator DeMint (R):
You don't have much choice if you charge something on your credit card. You have to pay for it, and that's effectively what this debt limit is... we've already spent the money. The question is now, do we shut down the government, or do we fund what we've already done?
(http://www.treasury.gov/initiatives/Documents/DLDeMint062811.pdf" [Broken])

We haven't hit a "credit limit" on a credit card. That's not the analogy. We've passed it. The money is spent. Now it has to be paid in the form of treasury securities which can be sold to private and public investors. The debt ceiling doesn't limit spending, it limits the selling of Treasury securities (effectively setting a limit on the amount of debt in circulation).

The debt ceiling says nothing about spending practices. The debt ceiling was passed between March 17th and May 30th of this year when you look at spending. And we have been spending since then. That's why people are talking about "default" now. The problem is people read headlines and listen to sound bites.

(March 2011) EDIT: Link removed... broken?
(May 2011) http://www.kaj18.com/news/obama-congress-prepare-for-next-round-of-budget-fights/
(May 2011) http://www.thestreet.com/story/11141473/1/us-debt-rating-under-threat-moodys.html
 
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  • #23
149
0
Perhaps it will be easier to understand in 6 weeks - when the 2012 budget is addressed. Should we start a new thread "CR or Budget 2012"?
 
  • #24
1,545
10
That would be nice, because it would make the whole sticky issue a lot simpler, but again, that's not true. In fact, if that were true, then we wouldn't default on any debt obligations, we would simply have to stop spending. There seems to be intentional misinformation circulating that this is an option.

A quote from senator DeMint (R):


(http://www.treasury.gov/initiatives/Documents/DLDeMint062811.pdf" [Broken])

We haven't hit a "credit limit" on a credit card. That's not the analogy. We've passed it. The money is spent. Now it has to be paid in the form of treasury securities which can be sold to private and public investors. The debt ceiling doesn't limit spending, it limits the selling of Treasury securities (effectively setting a limit on the amount of debt in circulation).

The debt ceiling says nothing about spending practices. The debt ceiling was passed between March 17th and May 30th of this year when you look at spending. And we have been spending since then. That's why people are talking about "default" now. The problem is people read headlines and listen to sound bites.
I think DeMint is talking about interest on the debt, because there is a risk that Obama would not prioritize interest payment over everything else, and thus there could be a default. (Obama suggested in his East Room press conference on the debt ceiling that it would be irresponsible to pay Chinese investors their interest before paying social security checks or Pell grants).

I agree with you that the debt limit ceiling limits the total amount of Treasury bonds in circulation, and I agree that we technically hit the ceiling a few months ago. You seem to be saying that after we hit the ceiling, we just kept spending the same amount of money, and now we have to pay for that spending in excess of the ceiling. If your account is correct, where did we get the money? We can't spend a dollar if we didn't get it from somewhere, and we must either have gotten it out of revenues or out of borrowing. It is literally impossible for the government to spend money first and then issue debt later to pay for it.

What really happened a few months ago is that the Treasury department took extraordinary (though not unprecedented) action. Federal government workers have pension plans, which they contribute a portion of their salaries to. Usually Geithner takes those contributions and puts that money in the pension funds, known as CSRDF and GSIF, and then pension benefits for retirees are paid out of those funds. But since we hit the ceiling, he has instead just been taking those pension contributions and using them for the general spending of the government. Of course, this practice can't go on forever, because every month the pension funds get depleted because they're needed to pay retirees. Eventually, the funds will be completely exhausted, so that Geithner will have to use the pension contributions of workers in order to pay the benefits, and so he won't be able to use that money to fund government operations. At that point he will have run out of tricks, and either the debt ceiling will have to be raised or else large portions of federal spending will be halted immediately. That is the magical date of August 2.
 
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  • #25
FlexGunship
Gold Member
369
8
It is literally impossible for the government to spend money first and then issue debt later to pay for it.
That's not true. Checks are issued against reserves when direct federal funding isn't available. The reserves are usually in the form of low grade unsecured bonds and aren't useful in international trade or with large investment institutions, but they allow day-to-day business to continue (like paychecks).

It's then the responsibility of the treasury to replace unsecured debts with secured debts prior to maturity.

What really happened a few months ago is that the Treasury department took extraordinary (though not unprecedented) action. Federal government workers have pension plans, which they contribute a portion of their salaries to. Usually Geithner takes those contributions and puts that money in the pension funds, known as CSRDF and GSIF, and then pension benefits for retirees are paid out of those funds. But since we hit the ceiling, he has instead just been taking those pension contributions and using them for the general spending of the government. Of course, this practice can't go on forever, because every month the pension funds get depleted because they're needed to pay retirees. Eventually, the funds will be completely exhausted, so that Geithner will have to use the pension contributions of workers in order to pay the benefits, and so he won't be able to use that money to fund government operations. At that point he will have run out of tricks, and either the debt ceiling will have to be raised or else large portions of federal spending will be halted immediately. That is the magical date of August 2.
This is an important point. Yes! Those are obligations that must be paid back to those pension programs. Additionally, lower grade unsecured bonds have been dispersed and need to be accounted for as federal debt.

We both seem to agree on that point that the U.S. Government has ALREADY spent more than the debt ceiling. I happen to be a libertarian, so I agree with your flavoring of the situation: spending MUST be curtailed immediately. But, regardless, in order to maintain our standing as a creditworthy borrower, the debt ceiling must be raised (and it appears as though that vote is imminent).

What has happened in the public arena is that republicans (full disclosure: I voted republican in the last midterm election and the last presidential election; the lesser of two evils (????)) have painted it as though it's an optional increase and that if we could just get our spending under control, we'd be all set. It's just not that simple; the debt ceiling has to be raised to pay current obligations (domestic and foreign). AFTER that's done, then we can talk about fixing the actual problem.
 

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