News What is the US Debt Limit Ceiling?

[SixNein]

I'm surprised by the confusion this is causing. The difference is simply that some spending is legally obligated contracts to third parties and can't be unilaterally canceled by the government, while other spending can be unilaterally cancelled. If you can just change your mind and not spend (say you delay buying a car for a year), that's not a "default".

Expansion, with three broad categories:

1. Discretionary spending. By definition; at the government's discretion. It is passed annually in a budget and can be (and often is) changed mid-year...usually increases, but it can also be decreased. Simply with a few strokes of a pen.

2. "Mandatory" spending. This is for "entitlements". The word "mandatory" is a reference to the fact that this spending doesn't have to be approved annually, but rather is long-term programs that automatically do their thing unless changes are made. Unless changes are made. So the same legality applies to these as to discretionary spending: The government can change or cancel these programs whenever it wants.

The debt limit would not change any contracts or any law. In other words, the treasury is obligated to fund those things in 1 and 2; as a result, the treasury would default because it is unable to do so. Keep in mind, the treasury does NOT have the power to change any spending law or contract. It is instead obligated to fund the things congress says it has to fund.

Just because congress has the power to avoid default does not mean it will. If congress fails to raise the debt limit, we will default needlessly. The only other option is for congress to make major changes to its outflows. It would have to cut whatever the shortfall is by the due date.

 

[SixNein]

Sixnein,
While there certainly is a component of services already rendered;
1. That component is small. It is a portion of the "discretionary spending" budget. And regardless of the word used to describe it, it still wouln't be the same as a debt default. I'm sure you've paid a bill late before and not much happened. And I'm also sure you are aware that your "cable bill" example is not representative: most utility bills accrue and are paid month-to-month.

2. Ongoing spending items like jet fuel could be saved immediately by grounding government airplanes. Worker pay could be saved by furloughing workers. These items would have a near-immediate impact (within days or weeks) on government spending levels.

3. None of our "entitlement spending" fits that description.

But your missing the point that congress doesn't actually act to change anything, and it is the only one with the legal power to do so. The treasury is obligated to fund these things by law. It is a LEGAL OBLIGATION period. It's non-negotiable for the Treasury. The treasury does not have any power what so ever to make changes in the law to avoid default. Only congress has that power. Just because congress has the power to make the changes (like raising the debt limit) does not mean the US avoids default. Congress actually has to exercise its power to avoid it.

read:

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.

http://www.treasury.gov/initiatives/Pages/debtlimit.aspx

bold mine.

 

[russ_watters]

Bob and I had a brief discussion of that point that you may have missed. To sum up:

Treasury has two laws to deal with here, not one. The other law is of course the debt ceiling law. So the treasury is left to choose which to violate and how. Unless you really think Geitner is an idiot, you should be able to assume none of the decisions he might make would include a bond default.

 

[Jimmy Snyder]

The dictionary may forgive us for our indiscretion, but I doubt the bond market will.

 

[SixNein]

Fortunately some experts are responding. From John Cochrane, finance and economics professor at Chicago (who cites those examples above):

Why not just take it from the US Treasury (who has all the financial and legal experts needed to figure things out... and this problem requires both types):
http://www.treasury.gov/initiatives/Documents/Debt Limit Myth v Fact FINAL.pdf

The problem with your cite's opinion is he's totally ignores the law. For example, what hierarchy exists that states bond holders must be given priority over statutory obligations?

From the GAO

We have previously examined challenges associated with managing cash
and debt when delays in raising the debt limit occurred, focusing on
the period from 1995 through 2010. We reported in February 2011 that
delays in raising the debt limit create debt and cash management
challenges for Treasury, and these challenges have been exacerbated in
recent years by a large growth in debt.[Footnote 3] The amount of
borrowing capacity provided by taking the extraordinary actions
available to Treasury has grown in size but has not kept pace with the
growth in Treasury's borrowing needs. This means that once debt
approaches the debt limit, Treasury may not be able to manage the
amount of debt subject to the limit for as long a period of time as it
had in the past before the debt limit must be increased. Further,
failure to raise the debt limit in a timely manner could have serious
negative consequences for the Treasury market and increase borrowing
costs.

http://www.gao.gov/assets/600/592835.txt

From the same source:

Delays in raising the debt limit can create uncertainty in the
Treasury market and lead to higher Treasury borrowing costs. GAO
estimated that delays in raising the debt limit in 2011 led to an
increase in Treasury’s borrowing costs of about $1.3 billion in fiscal
year 2011. However, this does not account for the multiyear effects on
increased costs for Treasury securities that will remain outstanding
after fiscal year 2011.

 

[SixNein]

Bob and I had a brief discussion of that point that you may have missed. To sum up:

Treasury has two laws to deal with here, not one. The other law is of course the debt ceiling law. So the treasury is left to choose which to violate and how. Unless you really think Geitner is an idiot, you should be able to assume none of the decisions he might make would include a bond default.

Actually, the treasury is probably facing a long list of legal nightmares. The central government doesn't exactly have a priority of creditors like many of the states. For example, you might look in state law and find that bond holders must come before other creditors except for maybe schools. The treasury isn't going to have such legal cover. And once those checks stop, a lot of different parties are going to be suing. Who knows how that'll even turn out. The treasury probably has all the legal and financial experts it needs to figure out its position. And it says its going to default.

At any rate, we'll call all of this a not-a-default if that makes everyone happy. I would disagree because these are all legal contracts in effect when funds stop but why parse over words. But hopefully, people can see risk here and understand why this is a much different issue than a budget induced shutdown. Congress would be taking a pre-fed law back when it use to issue debt and enforce this law. It's a nightmare for the financial system any way you look at it.

 

[mheslep]

The US Treasury has reported the numbers for the http://www.fms.treas.gov/mts/mts1212.pdf: three months Oct-Dec totaled a deficit of $292B, or on trend for another annual deficit over one trillion dollars ($1.17 trillion for the fiscal year ending next Sept). The interest on the debt alone for the 1st quarter FY13 was $133B.

It appeared the tax increase passed in January might improve the deficit picture a small amount, but then the Sandy disaster package of $60B was also passed in January and proposals to offset the spending elsewhere were defeated.