US Debt Ceiling Explained

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  • #26
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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.



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.
Worse yet, the debt deal spending cuts are designed to slow the increase of the national debt - not cut this year's (or next) actual spending.
 
  • #27
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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.
I haven't heard of these low-grade unsecured bonds before. Do you have any sources which talk about them?
This is an important point. Yes! Those are obligations that must be paid back to those pension programs.
Actually, under Federal law the Treasury Secretary is only required to pay back that money into those pension funds IF the debt ceiling is raised. Otherwise, he has no legal obligation to do so (although it would be unfair to government workers).

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.
I'm actually a democrat who wants more spending, and so I very much want the debt ceiling raised. I'm just saying that we don't default on our debts if it's not. But we would be betraying a lot of trust people have in the government. Poor people in federal housing, soldiers fighting around the world, government workers, companies receiving federal funding, scientists doing valuable research, etc., are all counting on us to spend the money we promised.
 
  • #28
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I'm actually a democrat who wants more spending, and so I very much want the debt ceiling raised. I'm just saying that we don't default on our debts if it's not. But we would be betraying a lot of trust people have in the government. Poor people in federal housing, soldiers fighting around the world, government workers, companies receiving federal funding, scientists doing valuable research, etc., are all counting on us to spend the money we promised.
Given the fact the Government doesn't have the money to pay these obligations and must borrow 43% of every dollar spent - shouldn't we feel betrayed by our politicians in that they don't even have a budget - yet they've promised more and more to people who depend on them?
 
  • #29
FlexGunship
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I haven't heard of these low-grade unsecured bonds before. Do you have any sources which talk about them?
Well, I'll have to try to find something official, but it was a big issue at the last city council meeting since most of our local construction contractors were paid with funds backed by these unsecured bonds with assurance that they would be replaced with secured bonds come This November (6 months after issuance, but 6 months before maturity).

Now there is fear that the unsecured bonds will come to maturity and will be defaulted upon.

So, the work (which was done under the Federal stimulus plan) has already been done, and was paid for with temporary funds with assurance that those funds would be paid for by the U.S. government. It's already a done deal; the road exists and has been painted and is being driven on. It's an obligation whether your agree with it in principle or not. The contractors have been paid, cashed their checks, and got their money. So the bank will come to the city to collect the mature value of the bonds starting May of next year, and the city will go to the state.

Somewhere, someone has to pay off those bonds. The bank could choose to hold onto those bonds but I don't think that's common practice. The treasury is supposed to sell high-grade secured bonds and give the cash to the state, so the state can give the cash to the city, so the city can pay off the bonds the bank holds.

It affects every level! The next time work has to be done, banks will be more cautious. Most U.S. debt is help by private individuals and institutions inside the U.S. Here's an example of some.
 
  • #30
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Worse yet, the debt deal spending cuts are designed to slow the increase of the national debt - not cut this year's (or next) actual spending.
Actually, the debt deal cuts about 22 billion dollars from the 2012 budget, which will reduce the spending-to-GDP ratio by a tiny amount. (You shouldn't compare the actual dollars spent, because 2011 dollars are not the same as 2012 dollars, because the economy is likely to be bigger in 2012.)
 
  • #31
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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
OK, so the Wizard is doing some magic behind the curtain at the Fed.
 
  • #32
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Actually, the debt deal cuts about 22 billion dollars from the 2012 budget, which will reduce the spending-to-GDP ratio by a tiny amount. (You shouldn't compare the actual dollars spent, because 2011 dollars are not the same as 2012 dollars, because the economy is likely to be bigger in 2012.)
How much do you expect the economy to grow in 2012 - and why?
 
  • #33
FlexGunship
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OK, so the Wizard is doing some magic behind the curtain at the Fed.
Actually, Geithner is the secretary of the Treasury. Bernanke is the chairman of the Federal Reserve. But, yes, Geithner is quite the "wizard." It's good to have an economist on the post as opposed to a banker; I like him better than Paulson.

EDIT: The fact that I didn't like Paulson had NOTHING to do with his previous position as CEO of Goldman Sachs; I think that actually worked in his favor.
 
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  • #34
Ivan Seeking
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Actually, Geithner is the secretary of the Treasury. Bernanke is the chairman of the Federal Reserve. But, yes, Geithner is quite the "wizard." It's good to have an economist on the post as opposed to a banker; I like him better than Paulson.

EDIT: The fact that I didn't like Paulson had NOTHING to do with his previous position as CEO of Goldman Sachs; I think that actually worked in his favor.
I too think quite highly of Geithner. But Paulson gets high marks from me as well. When push came to shove, he abandoned a lifetime of ideology for the good of the country. I have to respect that no matter what else he may have done.

I have a friend on the left who thinks it a crime that someone like Geithner is running the Treasury. I don't get it. Who do we want; someone who doesn't understand the system?
 
  • #35
FlexGunship
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I too think quite highly of Geithner. But Paulson gets high marks from me as well. When push came to shove, he abandoned a lifetime of ideology for the good of the country. I have to respect that no matter what else he may have done.

I have a friend on the left who thinks it a crime that someone like Geithner is running the Treasury. I don't get it. Who do we want; someone who doesn't understand the system?
See, I used to feel the exact opposite; very strongly, in fact. When Geithner was nominated I thought it was the apocalypse. But he has a very practical sense of economic theory (oxymoronic?) which was not made obvious to the public.

Paulson may have done well from an "overcoming-personal-challenges" point of view, but he had a history of repeatedly saying the housing market was either stable, already at the bottom, or under control. Even when he chooses not to take action, he should've been able to do a better job of figuring this stuff out. Could I have done it? NO WAY! But I'm also not accepting nominations for Secretary of the Treasury. I don't, for a second, think he was anything but honorable and did his best on behalf of the country... he just didn't seem to do a very good job in retrospect.

Also... he looks disturbingly like Sarek from the newest Star Trek movie.

images?q=tbn:ANd9GcR9q3AISkczTx2KiWRh51XAH6SjQ5zce-DjfpwEbSje-xYYcNaenQ.jpg

220px-Henry_Paulson_official_Treasury_photo%2C_2006.jpg
 
  • #36
Ivan Seeking
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See, I used to feel the exact opposite; very strongly, in fact. When Geithner was nominated I thought it was the apocalypse. But he has a very practical sense of economic theory (oxymoronic?) which was not made obvious to the public.
I didn't know a lot about Geithner but I had faith in Obama. :biggrin:

Paulson may have done well from an "overcoming-personal-challenges" point of view, but he had a history of repeatedly saying the housing market was either stable, already at the bottom, or under control. Even when he chooses not to take action, he should've been able to do a better job of figuring this stuff out. Could I have done it? NO WAY! But I'm also not accepting nominations for Secretary of the Treasury. I don't, for a second, think he was anything but honorable and did his best on behalf of the country... he just didn't seem to do a very good job in retrospect.
Agreed. His record as Sec of Treasury was dismal before the crisis. In fact, his decision to allow Lehman bros to fail is what actually started the crash of the stock market. But his handling of the crisis was most impressive. He went to the President and Congress and did what had to be done - essentially asked for a blank check and absolute control. It took a lot of nerve and personal discipline to manage things as he did.

Also... he looks disturbingly like Sarek from the newest Star Trek movie.

images?q=tbn:ANd9GcR9q3AISkczTx2KiWRh51XAH6SjQ5zce-DjfpwEbSje-xYYcNaenQ.jpg

220px-Henry_Paulson_official_Treasury_photo%2C_2006.jpg
Hey, even former Sec's of Treasury need work.
 
  • #37
FlexGunship
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I didn't know a lot about Geithner but I had faith in Obama. :biggrin:
Well, not everyone did (or still does).

Agreed. His record as Sec of Treasury was dismal before the crisis. In fact, his decision to allow Lehman bros to fail is what actually started the crash of the stock market. But his handling of the crisis was most impressive. He went to the President and Congress and did what had to be done - essentially asked for a blank check and absolute control. It took a lot of nerve and personal discipline to manage things as he did.
Eh, I have a hard time holding Lehman's failure against him. That's a tough call to make (to suddenly overhaul capitalism in the blink of an eye) and I think anyone with a sound economic background would've done the same thing. All free market ventures are experiments, and the Lehman experiment failed.

The only thing I hold against him is his weird obliviousness to what we could all see around us.

Here: I'm calling it RIGHT NOW... the next bubble will be the college-tuition and college-degree bubble. It's growing, and it will pop in about 8 - 10 years.
 
  • #38
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Actually, Geithner is the secretary of the Treasury. Bernanke is the chairman of the Federal Reserve. But, yes, Geithner is quite the "wizard." It's good to have an economist on the post as opposed to a banker; I like him better than Paulson.

EDIT: The fact that I didn't like Paulson had NOTHING to do with his previous position as CEO of Goldman Sachs; I think that actually worked in his favor.
actually, i was referring to this from your link:
Adding to the uproar: a coming debate over the need to raise the federal government's debt limit. Washington is rapidly nearing the roughly $14.29 trillion ceiling and is expected to exceed the cap by mid-May. Although the Federal Reserve can take some steps to delay the need to raise the cap until July, a failure to do so could ultimately lead to a default.
what is this about the treasury?
 
  • #39
FlexGunship
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OK, so the Wizard is doing some magic behind the curtain at the Fed.
what is this about the treasury?
I incorrectly assumed you were talking about Geithner since, at the time, the topic of discussion in the thread seemed to be Geithner and the Treasury's role.
 
  • #40
Ivan Seeking
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Well, not everyone did (or still does).
That's okay. Everyone will catch up eventually. :biggrin:

Eh, I have a hard time holding Lehman's failure against him. That's a tough call to make (to suddenly overhaul capitalism in the blink of an eye) and I think anyone with a sound economic background would've done the same thing. All free market ventures are experiments, and the Lehman experiment failed.
He picked on Lehman Bros to demonstrate market discipline - a completely arbitrary and philosophical choice. The markets started to crash as soon as he made the announcement. It is conceivable that the crash might have been avoided were it not for that misstep. Again this speaks to his ignorance of [or inability to accept, which is understandable] the magnitude of the events transpiring. There was no way to avoid the downturn but it might have been a softer fall.

Likewise, much of that spending Obama has done is not driven by liberal ideology, it is driven by the economics of severe recessions. I get so sick of the right ignoring the reason for much of the spending - nevermind two wars.

Here: I'm calling it RIGHT NOW... the next bubble will be the college-tuition and college-degree bubble. It's growing, and it will pop in about 8 - 10 years.
I think we are seeing the next bubble right now - gold.
 
  • #41
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Likewise, much of that spending Obama has done is not driven by liberal ideology, it is driven by the economics of severe recessions. I get so sick of the right ignoring the reason for much of the spending - nevermind two wars.

I think we are seeing the next bubble right now - gold.
How does one separate liberal ideology from the increased spending (and wanting to raise taxes) in a recession? Also (trouble keeping score:confused:) - Bush gave President Obama 1 war that he didn't like and 1 war that President Obama did like - and President Obama raised Bush 1 war that nobody likes - is that correct?

As for bubbles - let's not discount the remaining problem with housing and derivatives (global and local), US Treasuries (although QE may have taken enough off the street), US Dollars (printed to pull back Treasuries) might be a problem with inflation lurking, and yes gold might be a problem (VERY complicated - but a problem).

I still think physical gold is safe (today) - futures are scary (better know your limits) - can you think of a better way to lure a lamb to slaughter than with GOLD?
 
  • #42
Ivan Seeking
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How does one separate liberal ideology from the increased spending (and wanting to raise taxes) in a recession?
First of all, you asked two questions. How does Obama justify increased spending during a recession? That is what governments are supposed to do. That is economic theory, not ideology.

Next, how does he justify raising taxes in a recession? The same way the right is demanding that we reduce spending, which also has a negative impact on an ailing recovery. The problem is that we face pressure on two fronts - a recession, and excessive debt. But you also assume that conservatives never support more taxes. That is false. It is however the popular paradigm in the right-wing media. This is where ideology and economics part company.

Even the conservative columnist David Brooks agrees that many of the loopholes were themselves distortionary. The pragmatic conservative position is that we want to minimize taxes, not eliminate them. As have many economists, as well as the bipartisan Commission on Fiscal Responsibility and Reform, one can accept that we need to adjust tax rates without breaking out the incense and pyramids.

Also (trouble keeping score:confused:) - Bush gave President Obama 1 war that he didn't like and 1 war that President Obama did like - and President Obama raised Bush 1 war that nobody likes - is that correct?
That is correct on the first two points and media hype on the third. Bush ignored the real war that Obama supported and instead went off on a wild goose chase. Had Bush done his job, Obama wouldn't have been handed such a mess.

As for Libya, we will see which works better: Bush's approach, or Obama's approach. Iraq vs Libya - let's see where we land before passing judgment. Which cost us the most. You are calling the game in the third quarter. From what I see, Libya is costing us so much less than Iraq that hardly anyone notices.

It was no surprise to me that Obama got Bin Laden after only two+ years when Bush couldn't get him in over seven years, and after starting two wars. As they say, luck favors the prepared.

As for bubbles - let's not discount the remaining problem with housing and derivatives (global and local), US Treasuries (although QE may have taken enough off the street), US Dollars (printed to pull back Treasuries) might be a problem with inflation lurking, and yes gold might be a problem (VERY complicated - but a problem).

I still think physical gold is safe (today) - futures are scary (better know your limits) - can you think of a better way to lure a lamb to slaughter than with GOLD?
I too think gold is safe today, but everything that goes up must come down. I think we will recover and the panic buying that has been in process for some years will at some point, collapse. However, I don't need to know my limits. I earn my money. I don't gamble. :biggrin:
 
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  • #43
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It was no surprise to me that Obama got Bin Laden after only two+ years when Bush couldn't get him in over seven years, and after starting two wars. As they say, luck favors the prepared.
It doesn't hurt that he was hiding in a million dollar compund next to an allies military college - instead of a cave either.
 
  • #44
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I too think gold is safe today, but everything that goes up must come down. I think we will recover and the panic buying that has been in process for some years will at some point, collapse. However, I don't need to know my limits. I earn my money. I don't gamble. :biggrin:
IMO - one of the worst things that happened to our economy was when savings (downward pressure on interst rates) fled to the stock market in search of higher returns. Continued IMO - the pensions were in trouble after the S&L collapse and the small investors cashed CD's to bail them out.
 
  • #45
FlexGunship
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That's okay. Everyone will catch up eventually. :biggrin:
We don't need to turn this into a pro-Obama or anti-Obama thing, but there are a LOT of perfectly valid reasons not to like our current president. I am freely and openly admitting that he is doing significantly better as a leader than I would've guessed, but that doesn't somehow magically assuage all of those historically valid concerns.

To begin with, he had an eerily short political career before running for president. He was a state legislator for 7 years (not quite an impressive office) where he sponsored bills on "Racial Quotas" (http://pqasb.pqarchiver.com/chicago...dids=352884461:352884461&FMT=ABS&FMTS=ABS:FT") for police by forcing them to record the skin color of a driver detained during a traffic stop. As though there was some ideal ratio of white to black people that had to be met. I'm not saying he's racist; there's a HUGE difference here. I'm saying that he, with the best possible intentions, made some serious legislative mistakes.

Then he was elected to the U.S. senate where he held office as a Junior Senator for 2 years before announcing his candidacy for president. At the time, even other Democratic Senators had a hard time naming any piece of legislation he sponsored or authored and yet they supported him whole-heartedly.

You don't have to hate Obama to admit that there were, and might still be, perfectly valid reasons to worry about his presidency.

He picked on Lehman Bros to demonstrate market discipline - a completely arbitrary and philosophical choice. The markets started to crash as soon as he made the announcement. It is conceivable that the crash might have been avoided were it not for that misstep. Again this speaks to his ignorance of [or inability to accept, which is understandable] the magnitude of the events transpiring. There was no way to avoid the downturn but it might have been a softer fall.
"Market discipline" is neither arbitrary nor philosophical. It's a perfectly valid economic principle which has served as a good baseline in the past. In fact, it is THE guiding principle in a non-command economy. The rest of your paragraph is fine; I take no issue with it.

Paulson didn't make an arbitrary decision. MAYBE he made the wrong one; but it wasn't arbitrary.

How does Obama justify increased spending during a recession? That is what governments are supposed to do. That is economic theory, not ideology.
To be fair, his economic theory is driven by his liberal ideology. Specifically Keynesian theory. The term "liberal" as it applies to financial policies means "liberal application of government in the economy." Keynesian economic theory as applied to a recession REQUIRES a liberal application of government in the economy. To say that Keynesian economic theory is not "liberal" is to distort the meaning of the word.

I too think gold is safe today, but everything that goes up must come down. I think we will recover and the panic buying that has been in process for some years will at some point, collapse. However, I don't need to know my limits. I earn my money. I don't gamble. :biggrin:
It's not a gamble! It's a sure thing! Haven't you seen gold-backed funds lately?! :approve:

Joking aside, gold is inherently a little safer because it is a precious metal with limited supply. Houses, on the other hand, are made of relatively cheap and plentiful resources. The value of a house is largely determined by the labor invested in it's construction. Gold doesn't rely on this as a determiner of value. So there IS a difference; however, I agree... its value does seem to be heavily inflated.

I would still argue that college (as a service and commodity) is on it's way to bubble-status. The value of a college degree is largely determined by the labor value and that value is artificially inflated right now; when students begin defaulting on school loans because they can't find high-enough paying jobs, institutions will stop lending to prospective students because they are high-risk, and the bubble will burst.

The worst part is that as colleges collapse the market will be flooded with... blech... academics.
 
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