News What is the US Debt Limit Ceiling?

[StevieTNZ]

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?

 

[Astronuc]

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]

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/
http://www.moneyfactory.gov/aboutthebep.html

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.

 

[russ_watters]

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.

 

[mheslep]

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]

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]

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.

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:

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

 

[Astronuc]

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.

 

[nanosiborg]

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.

 

[nanosiborg]

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.

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.

 

[lugita15]

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]

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]

... 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]

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]

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://taxprof.typepad.com/taxprof_blog/2013/01/cbo-on-fiscal-cliff-deal-.html
http://www.cbo.gov/sites/default/files/cbofiles/attachments/American Taxpayer Relief Act.pdf

 

[mheslep]

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)

 

[Greg Bernhardt]

we should hope a deal is reached soon to raise the debt ceiling

To what end?

 

[ImaLooser]

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]

Something to ponder on the debt and chronic deficits:

Looking for someone to blame? Congress is a good place to start
http://articles.orlandosentinel.com/2011-07-11/news/os-ed-charley-reese-545-column-07111120110711_1_congress-votes-deficits-bureaucracy

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.

 

[Locrian]

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.

 

[SixNein]

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
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

And now you can minus U.S. Holdings of Foreign Securities.

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

 

[Locrian]

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]

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?

 

[nanosiborg]

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.

 

[Locrian]

And now you can minus U.S. Holdings of Foreign Securities..

No you should not. Those are primarily private US holdings of foreign debt. You should not subtract that from the government debt. If Astronuc, whom you quoted, was looking at total US debt, private and public, then you could consider removing that value.

From the link:

U.S. portfolio investment in foreign securities, for the purposes of this report, includes all foreign securities owned
by U.S. residents except those that are part of a direct investment relationship between the U.S. resident owner of the
foreign securities and the foreign issuer of the securities.

 

[Greg Bernhardt]

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.

The Senate hasn't passed a budget in over three years
http://www.politifact.com/ohio/stat...oehner-says-senate-dems-havent-passed-budget/

 

[Locrian]

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.

Are you sure? From what I can tell, revenues will be large enough to cover all interest payments, and debt due can be rolled over. There is even money left over to pay several of the larger obligations. So it is entirely possible to shut down portions of the government and stay current on external financial obligations.

I’m not saying this is wise, I just don’t see how a government shut down is “a completely different galaxy."

 

[russ_watters]

But they have been passing spending laws, if not an actual budget. So both are Congessional problems. Congress mandates the spending but not the borrowing authority, even though it knows it is needed.

The Democrats have loaded the gun and dared Republicans to pull the trigger.

 

[mheslep]

...Default would be a catastrophe. ...

Commonly stated but I think highly unlikely. The federal government brings in ~$2.5T/year, and even if the debt limit is not raised, new debt can still be issued as old expires, the government can still borrow under the limit.

 

[SixNein]

Are you sure? From what I can tell, revenues will be large enough to cover all interest payments, and debt due can be rolled over. There is even money left over to pay several of the larger obligations. So it is entirely possible to shut down portions of the government and stay current on external financial obligations.

I’m not saying this is wise, I just don’t see how a government shut down is “a completely different galaxy."

In a budget induced shutdown, the question is about what new obligations the government should undertake.
In a debt limit situation, the question is about all current and previous obligations that the government said it would take on (All passed budgets).

With a budget crisis, the risks are fairly well known and manageable. Lots of stuff keeps on working due to mandatory spending, but we don't know if the government will hire 10 postal workers or lay off 10 postal workers.

With a debt limit crisis, there is no real way to calculate the risk. The world considers the US T-bill to be a great safe haven. If we default, how will the perception of the T-bill change? What happens when it's no longer a safe asset? If your holding these bills, do you look a them in the same way before and after default? If someone starts selling in a panic, are you gong to hold out?

 

[Locrian]

If we self-default, how will the perception of the T-Bill change? What happens when it's no longer a safe asset?

Why are you assuming we'll default? If the debt limit isn't raised, there's enough revenues to pay interest and debt due can be rolled over.

 

[ImaLooser]

Commonly stated but I think highly unlikely. The federal government brings in ~$2.5T/year, and even if the debt limit is not raised, new debt can still be issued as old expires, the government can still borrow under the limit.

That's true. I was being loose. Actually defaulting on the debt isn't going to happen. But whatever they did would be highly embarrassing and bad for the credit rating. One of the US main assets is its reputation for fiscal honesty. A great deal of money is invested here for that reason, a situation greatly to the advantage to the US, and jeopardizing that could very well lead to catastrophe.

 

[russ_watters]

But whatever they did would be highly embarrassing and bad for the credit rating.

Not really. Most people don't even know (much less feel embarrassed) that we've actually already passed the deadline and the Fed has started contingency action (before we hit it):

The U.S. Treasury on Wednesday announced the first of a series of measures to delay hitting the government's $16.4 trillion borrowing limit. Without those steps, the debt ceiling would be hit on Dec. 31.

http://www.nbcnews.com/business/us-treasury-take-steps-avoid-hitting-debt-ceiling-monday-1C7662780

As we get closer and closer, there are more and more actions to be taken to avoid default. The embarrassing one for Obama would be a partial government shutdown.

 

[russ_watters]

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?

Fire and brimstone predictions are overblown. As I posted in the other thread (perhaps they should be merged...), the deadline has actually already come and gone and contingency plans have already started and few people have even noticed. The further we go, the more contingency plans get put in place, but we are a long, long way from default. http://www.nbcnews.com/business/us-treasury-take-steps-avoid-hitting-debt-ceiling-monday-1C7662780

And yes, one of those contingency plans could be a partial government shutdown.

Obama's flip-flop on the issue (his position was precisely opposite of now, when he was on the other side of the fence) is probably a reflection of:
1. Even as ideologically driven as he is, he's more political than principled.
2. He knows that he has a lot to lose politically from this. Fortunately for him, he's going against a weak opponent in Boehner

Based on previous experience and predictions, we can probably operate under various contingency actions for at least 3 months:

Treasury Secretary Timothy Geithner explained that when the debt ceiling is reached, the US Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt,[48] such as the sale of assets from the Civil Service Retirement and Disability Fund and the G Fund of the Thrift Savings Plan. These measures were implemented on May 16, 2011, when Geithner declared a "debt issuance suspension period". According to his letter to Congress, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted".[2] These methods have been used on several previous occasions in which federal debt neared its statutory limit.[49]

http://en.wikipedia.org/wiki/United_States_debt-ceiling_crisis

 

[mheslep]

That's true. I was being loose. Actually defaulting on the debt isn't going to happen. But whatever they did would be highly embarrassing and bad for the credit rating. One of the US main assets is its reputation for fiscal honesty. A great deal of money is invested here for that reason, a situation greatly to the advantage to the US, and jeopardizing that could very well lead to catastrophe.

I think the policy resulting in borrowing over a trillion dollars a year should be the focus of embarrassment. That policy is guaranteed to cause eventual catastrophe, unlike one that stops additional borrowing.

 

[BobG]

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.

The Senate hasn't passed a budget in over three years
http://www.politifact.com/ohio/stat...oehner-says-senate-dems-havent-passed-budget/

But they have been passing spending laws, if not an actual budget. So both are Congessional problems. Congress mandates the spending but not the borrowing authority, even though it knows it is needed.

It all smacks of a group that has seemed to reach a point where it's impossible for them to do their job.

Passing a budget/passing spending bills and then refusing to authorize the government to obtain the money necessary to execute that budget is just asinine. Just on principle, a government shutdown for that reason would be worse than a government shutdown because Congress couldn't agree on a budget.

But, shutting down government because Congress can't agree on a budget is still a bad thing. One of Congress's key duties is to pass a budget and keep government running. Individual members can pass the blame back and forth, but the bottom line would be that Congress failed to do its job.

And the solution Congress comes up for not being able to do its job (pass a budget) is to not do its job (keep government running)? If that's the solution, at least scrap that stupid requirement to include which part of the Constitution authorizes the bill and instead include in the introduction of each bill the statement, "Us being idiots... "

The important thing is to get something passed that's relatively close to being balanced. If the taxes required to do that are too high, then people will feel that in their wallets and you're going to see quite a few liberal Congressmen bounced out of office. If the services provided are too low, people will feel that, too, and quite a few conservative Congressmen will get bounced out of office.

If the budget is close to being balanced (i.e. - realistic), you'll get some type of equilibrium created by people's opinions. The only long term damage that can be done is with budget deficits where people won't feel the pain for years.

 

[SixNein]

Fire and brimstone predictions are overblown. As I posted in the other thread (perhaps they should be merged...), the deadline has actually already come and gone and contingency plans have already started and few people have even noticed. The further we go, the more contingency plans get put in place, but we are a long, long way from default. http://www.nbcnews.com/business/us-treasury-take-steps-avoid-hitting-debt-ceiling-monday-1C7662780

And yes, one of those contingency plans could be a partial government shutdown.

Obama's flip-flop on the issue (his position was precisely opposite of now, when he was on the other side of the fence) is probably a reflection of:
1. Even as ideologically driven as he is, he's more political than principled.
2. He knows that he has a lot to lose politically from this. Fortunately for him, he's going against a weak opponent in Boehner

Based on previous experience and predictions, we can probably operate under various contingency actions for at least 3 months: http://en.wikipedia.org/wiki/United_States_debt-ceiling_crisis

A partial government shutdown means that the government would no longer be meeting it's obligations and would be in default. And while contingency plans may help explain how we are going to manage our default, it would still be a default. And what happens depends how how the bond markets react to a default.

Maybe the bond market brushes the default aside, or maybe the last one out of the t-bill is a rotten egg. We don't know. It's a crazy risk to take.

In my opinion, the bond market is viewing this as nothing more than political theater, and it believes the US will raise its debt limit. But at the same time, it opens itself up to the risk of being surprised.

 

[Locrian]

A partial government shutdown means that the government would no longer be meeting it's obligations and would be in default.

False.

You can shut down some parts of the government and still pay interest on notes and bonds while rolling over debt due. If you do that, you are not in default.

 

[SixNein]

False.

You can shut down some parts of the government and still pay interest on notes and bonds while rolling over debt due. If you do that, you are not in default.

The government is obligated by law to fund the things it will no longer be able to fund due to lack of funds. Thus the government goes into default on its obligations. How the government manages the default is in the details of who continues to get paid and who doesn't.

Suppose the government defaults but continues to pay interest on its bonds. Bond holders are faced with the political reality that their now in direct competition with granny's SSI check or some soldier's paycheck, and bond holders may lose that political battle in the long run.

 

[ImaLooser]

The embarrassing one for Obama would be a partial government shutdown.

The Gingrich government shutdown cost the Rs some seats in Congress. The will hesitate to do that again.

 

[russ_watters]

A partial government shutdown means that the government would no longer be meeting it's obligations and would be in default.

No, the two things have nothing to do with each other. We had a partial government shutdown in 1995 and didn't default.

A partial government shutdown means shutting down government offices funded by discretionary spending: http://en.wikipedia.org/wiki/United_States_federal_government_shutdown_of_1995_and_1996

And while contingency plans may help explain how we are going to manage our default, it would still be a default.

No it isn't. We're not in default now, are we?

A default is completely unnecessary. Debt service is a relatively small part of the budget and currently we are borrowing 40% of the budget so we'd be able to fund 60% of spending without a debt deal. The biggest risk is a halt to Social Security payments.

Your understanding of the issue is severely wrong.

[edit2] I'm really not certain if you do understand and are trolling or if you really are confused. Let me be more explicit about it:

Since we are currently borrowing 40% of our spending, if the debt ceiling is not raised, we could still spend 60% of what we spend now. Here's what it gets spent on:

Now Geitner, not being an idiot, would likely not do something self-destructive like "default" on debt service payments, which at 7% of the budget should not be in danger. In order of what I think is likely:

1. Shutting down the national parks, etc. (partial government shutdown) = not a "default"/not a disaster/happened before.
2. Ground the military. (also not a "default")
3. Delay "entitlement" spending such as social security checks by a week. (also not a "default")

"Entitlement" spending would have the biggest direct impact of course. And it would be unavoidable since it is such a huge fraction of the government. But that's not a "default" either. It would impact people but not have a major impact our financial stature, unlike a default which would likely cause an instant collapse of our economy.

 

[BobG]

The Gingrich government shutdown cost the Rs some seats in Congress. The will hesitate to do that again.

Republicans lost 8 seats in the House and gained 2 seats in the Senate. Republicans still retained their majority in both the House and the Senate. I don't think that would give them all that much reason to hesitate.

On the other hand, that was also the best possible scenario for Republicans. Both the House and Senate passed a budget, but Clinton vetoed it.

That's an entirely different scenario than Congress being unable to create a budget bill at all. The President is never put on the spot to sign or veto the bill because it never makes it to his desk in the first place.

If the best possible scenario didn't turn out well, the worst possible scenario (House Republicans unable to agree among themselves on a budget bill) surely can't turn out well.

 

[turbo]

The biggest risk is a halt to Social Security payments.

Let's clarify: SS is paid for by payroll taxes and cannot add to our country's deficit. If the obstructionists in Congress want to put SS payments at risk, they would be thoroughly voted out of office in the next election. The people who rely on SS for their incomes aren't all liberals or moderates. There are lots of Republican voters who rely on SS to keep body and soul together,and they will be severely ticked off if these political games threaten the meager income that they have paid for all their lives.

 

[BobG]

Failing to pay Social Security retirement benefits and/or other federal pension benefits wouldn't be a default?

Perhaps not in the sense of loans the government has taken, but these are surely legal obligations the government has committed itself to and they are surely obligations the government has already received money for in one way or another (either by retirees paying into Social Security during their working career or as a deferred part of workers compensation in the case of retiree benefits).

 

[Locrian]

The government is obligated by law to fund the things it will no longer be able to fund due to lack of funds. Thus the government goes into default on its obligations. How the government manages the default is in the details of who continues to get paid and who doesn't.

Suppose the government defaults but continues to pay interest on its bonds. Bond holders are faced with the political reality that their now in direct competition with granny's SSI check or some soldier's paycheck, and bond holders may lose that political battle in the long run.

There appears to be some disagreement over the definition of the word "default". So let's be clear: you default if you don't pay your debts. If the government pays the interest on its debt and either rolls over standing debt or pays it, then it is not in default.

It's that simple.

 

[Locrian]

There are lots of Republican voters who rely on SS to keep body and soul together,and they will be severely ticked off if these political games threaten the meager income that they have paid for all their lives.

Agreed; many US citizens wrongly believe they have "paid for" their social security. Of course, SS is a pay-go system that transfers money from workers to retirees (and the disabled), but neither party can count on people being aware of this.

The good people of this forum should work to educate others as to how SS finances actually work.

 

[Locrian]

Failing to pay Social Security retirement benefits and/or other federal pension benefits wouldn't be a default?

Failing to pay interest on SS trust fund debt would be a default. Debt due can be rolled over. Choosing not to pay SS benefits, if done correctly, would not be a default, as SS is not a funded plan.

Pension benefits are supposed to be funded, and so, if funded appropriately, wouldn't be impacted one way or another. In reality they probably would be. (Haven't they been drawing from them for months now? Someone clarify if you know the details)

 

[SixNein]

No, the two things have nothing to do with each other. We had a partial government shutdown in 1995 and didn't default.

But that's because the nature of the shutdown was fundamentally different. A budget induced shutdown is a disagreement on future obligations that the government should or shouldn't take on.As I have been saying, this type of shutdown is in a different galaxy than what we are currently discussing. The shutdown via debt limit would be a default. The government would not have the funds to fund all of its existing obligations. So it is forced to start shutting things down despite its obligations to fund them.

A default is completely unnecessary. Debt service is a relatively small part of the budget and currently we are borrowing 40% of the budget so we'd be able to fund 60% of spending without a debt deal. The biggest risk is a halt to Social Security payments.

You just contradicted yourself. Funding 60% of our bills isn't 100% now is it? Thus the government defaults.

Now Geitner, not being an idiot, would likely not do something self-destructive like "default" on debt service payments, which at 7% of the budget should not be in danger. In order of what I think is likely:

1. Shutting down the national parks, etc. (partial government shutdown) = not a "default"/not a disaster/happened before.
2. Ground the military. (also not a "default")
3. Delay "entitlement" spending such as social security checks by a week. (also not a "default")

"Entitlement" spending would have the biggest direct impact of course. And it would be unavoidable since it is such a huge fraction of the government. But that's not a "default" either. It would impact people but not have a major impact our financial stature, unlike a default which would likely cause an instant collapse of our economy.

And here is where you are wrong. These are defaults!

The government has the legal obligation to fund these things because it said it would do it. It passed a budget, and it said we're going to pay xyz on this or that. The bill comes due, and the government is unable to pay. It's a default.

Again, you people confuse this situation with a budget induced shutdown. In a budget induced shutdown, some programs may or may not be renewed in the future budget that congress is having trouble passing. In such a situation, the programs will be funded until it expires as per the contract the government agreed to in its previous budget. So when that contract expires, the entity receiving the funds has been fully paid off. It will shutdown unless the government takes on new obligations (ie: renews the contract or whatever) in the new budget.

In the above situation, there is no default because the government paid what it said it would pay.

In the situation of the debt limit, congress passed the budget agreeing to take out all of these contracts. The bill comes due, and the government doesn't have enough funds to cover all of its obligations. Thus, things will still get shutdown but due to default. The government is legally obligated to pay these things, it simply can't raise enough money to do so.

As for consequences to a default, I have no clue how the bond market will react. The government is saying ok, if we default we'll continue paying you bond holders interest. In reality, we are essentially debating about throwing a torch in the middle of a bond market and hopping it doesn't catch on fire. There really is no other way of looking at it. It's pure insanity.

 

[SixNein]

False.

You can shut down some parts of the government and still pay interest on notes and bonds while rolling over debt due. If you do that, you are not in default.

Let me try a different approach... because my current explanation is getting absolutely nowhere.

I take out a cable subscription with a cable company.
I sign on the dotted line that I agree to pay x amount a month for a year.
In three months, I can no longer afford to pay x amount.
I default on my obligation.
The cable company shuts down my service (amongst other things).

The same situation is occurring with the debt limit. The government signed on the dotted line that it would pay x amount over a certain period of time to various different parties. These parties can be anything from bond holders to granny waiting on her SSI check. If the government is unable to make payments to meet its obligations, it defaults.

People are confusing this with a budget induced shutdown. In such a situation...

I take out a cable subscription with a cable company.
I sign on the dotted line that I'll agree to pay x amount for a year.
I pay x amount for a year.
I do not renew the contract and thus I"ll lose my service unless I change my mind.