It is beginning to look as though conservatives are serious about their proposal to refuse to raise the debt ceiling and to allow the country to default on its obligations. This is a serious business and the results could be catastrophic for the economy.

Whenever expenditures exceed revenues, the resulting deficit must be funded by borrowing. Throughout most of its history the government has run an annual deficit and issued Treasury Bonds/Notes to makeup the difference. These are purchased by individuals, organizations, and other nations. They are considered safe investments by investors around the world and as a result the United States can offer these instruments at low interest rates.

Before 1917 Congress had to approve every borrowing, but this was replaced by a debt ceiling, approved by Congress every so often, which allowed for smoother operation. 

Expenditure and debt authorization are separate actions by Congress. The debt ceiling does not place any limit on expenditure in advance—it merely permits  financing of deficits after they have been accrued. The debt ceiling has been raised numerous times in the past and until recently this action by Congress was routine.

Deficits are generally small—except when the country is fighting a war or in the midst of a recession—and the national debt is not a problem. Wars are enormously expensive. Recessions reduce revenue because people are out of work and not paying taxes.

What happens if Congress refuses to raise the debt ceiling to cover deficits resulting from expenditures they have approved? The country's credit rating will be downgraded and investors will demand higher interest rates to purchase our bonds. The increase in interest rates will actually make the deficit even worse. The lack of confidence in the nation's fiscal policies could also do substantial harm in the markets and push the country back into recession.

Defaulting is something you do only once, like losing your virginity. Getting the credit rating back to previous levels after a default would be extremely difficult. Investors would be likely to take a wait and see attitude, meanwhile enjoying a higher rate of return on their investments.

Threatening default has always been an unthinkable option to this point, but it is now a serious threat.

Tags: Debt, ceiling, default, deficit

Views: 263

Reply to This

Replies to This Discussion

When the general fund was allowed to dip into the Social Security lock box, it became easier and easier to bend first, then break the promised support.

The story is complex. The only way Social Security can hold funds is through special Treasury notes. That has always been the case and has never been changed. This was never a problem when the government did fund accounting—treating each fund as a separate entity. However during the Vietnam War Lyndon Johnson wanted to show a more balanced budget and realized he could do so if all the funds were combined. President Nixon who followed also liked the idea and in 1974 at his behest Congress passed a law doing that.

Social Security did not have much in the way of surpluses until Reagan appointed a commission to solve the coming demographic problems and they recommended an increase in the payroll tax to build up surpluses for the years when boomers would create a problem. That expanded tax was put in place about 1983-84 and all at once Social Security began to generate surpluses. In recent years the surpluses have gone at least as high as $170 billion and have helped to reduce the official deficit. (If you take out those surpluses, then President Clinton had a balanced budget in only one year.)

So the combining of all funds took place first and the Social Security surpluses came later. The problem is that in a few years the government will need to redeem the securities held by the trust fund to fund current retirees. That will be difficult, but it is the only honest thing to do since millions of people paid extra payroll taxes for the last three decades to fund Social Security. To say now that "we took your money in trust but cannot repay it" would be a travesty.

I agree, "To say now that "we took your money in trust but cannot repay it" would be a travesty" and theft. 

OH! you meant "for dinner" not an invitation for dinner! When I was in China in the 1980s, I met and talked to women living under their system. Women were required to work, they were given a month maternity leave and then had to go back into production. Creches operated by the government provided day care for very young children. Elders were expected to assume many household chores, including child care. It was not unusual to see old men and women sweeping streets, collecting garbage, and doing repairs to streets and buildings. Women agreed with the one woman one child because their lives were so harsh. Sadly, they often put their baby daughters to death because the custom was for women to go to the service of her husband's family. Families needed sons so they would have support in their old age. 

"This story of the Nien Rebellion foreshadows one of the biggest issues that China will face in coming decades: the dramatic excess of young men."

China's biggest problem? Too many men

I would note that the GOP doesn't like to use the words "austerity measures" to describe what they wish to do in "reigning in debt." There is a reason for this.

In every nation that has introduced austerity measures in modern times, economic collapse, hyperinflation, riots, political turmoil, and concentration of wealth amongst the powerful were the result. For an example of this see the Argentine economic crisis of 1999.

Austerity measures imposed just before the crisis raised the inflation rate to over 5,000% per annum.

Other examples of this currently are Greece and Spain. Massive unemployment, flight of capital. This is what the GOP has in store for us.

Times of low interest rates (like now) are when prudent governments do their borrowing for such projects as infrastructure improvement (as infrastructure is necessary for economic growth), yet the GOP stands against infrastructure improvements specifically.

Who does this benefit? Follow the money.

That's a great observation!  I hadn't ever realized how much easier it must be to borrow in a downturn when interest is low. That's a great arrow to have in my quiver! 

Be really careful, though, that you have a steady stream of income to pay it off. When interest rates rise, the banks will want to get their hands on those low interest loans and don't mind foreclosing if you fail to meet their obligations. 

Yes, for those countries that "introduced austerity measures in modern times, economic collapse, hyperinflation, riots, political turmoil, and concentration of wealth amongst the powerful were the result." Thank you for the link to Argentine economic crisis of 1999. It tells an important story that applies to USA today. I included a film below The Take - Avi Lewis & Naomi Klein and I hope the English subtitles work. I've had some problems finding a good translation. 

I apologize in advance for skimming through this discussion.  I saw this video and thought this was a great topic to share it with.  The last time I looked there were one or two comments - now there is a lot more content - doing a quick scan I didn't see this very relevant video in the discussion.

I believe hard work should be rewarded.  A society that encourages people to work hard is a prosperous one.  I also believe that for a society to compete with the rest of the world there has to be opportunity for many - not just opportunity for a few.

The debt ceiling is definitely a concern but I wonder if it is a manufactured distraction from  the elephant in the room.

Thank you for this video the elephant in the room; his figures accurately tell the economic story of the USA today. Any attempts to keep the tax rate down for wealthy top will maintain the problems that started in the late 1970s and 1980s. 

According to some economists, the debt ceiling and fiscal cliff use fear to gain public support. 

"So what are the consequences of jumping off the "fiscal cliff'?   According to many experts, there are none, because the "fiscal cliff' does not exist.   Ken Fisher, named as one of the thirty most influential people in the investment industry, pointed out in an interview with Forbes that changes to the tax code and federal spending do not take affect in one fell swoop.   He refers to the "fiscal cliff' as, "more of a fiscal rolling plain." (Ken Fisher Talks the Fiscal Cliff, Forbes, 12/18/2012)"

"The Congressional Budget Office (CBO) Report "Economic Effects of Reducing the Fiscal Restraint that is Scheduled..." has given fodder to "fiscal cliff' apocalypse theories.   The CBO projects tax hikes and federal spending cuts will produce a mild recession.   However, the report also states that if the current tax and spending policy is extended debt will rise faster than the GDP and by 2022 the federal debt owned by the public will reach 93% of the U.S.'s Gross Domestic Product.

The CBO report that fear mongers cite to support claims of an economic meltdown states, "the economic outcomes CBO expects, under current law, for the first half of 2013 strongly resemble mild recessions that occurred in the past.   It bears emphasizing, however, that economic forecasts are very uncertain."   (CBO. Economic Effects. Pg. 6) The CBO goes on to state that the U.S. will experience far greater consequences if revenue is not increased through taxation and federal spending is not decreased.  

Austerity is not the answer. Taxing the high incomes is. 

As of today the Republicans are offering a three month extension of the debt limit ceiling, contingent on the House and Senate passing a budget in that period. The first question is whether they have the votes in their caucus to pass such a bill.

The leadership has recognized that blocking the debt ceiling increase is a disastrous strategy for the GOP and they are getting a ton of negative response from the business community. Having insisted for so long that they will not pass an increase without major changes to entitlement programs, they feel they must get something in return for this three month deal and consequently they are tying it to passing a budget. That is still hostage taking, albeit in a minor key.

The Take - Avi Lewis & Naomi Klein

This documentary shows A) how neo-liberal politics can utterly destroy a country and B) how syndicalist and anarchist concepts can work today. Which are exactly the concepts behind the resistance, although they seldom call themselves anarchist they certainly achieve what anarchists have been striving for for generations.

Republicans and Democrats now seem united in an effort to pass a bill that will "suspend" the debt ceiling until May, thus avoiding both a default that would hurt the economy and the necessity of GOP members of Congress having to vote to raise the ceiling. Republicans can go home and tell their constituents that they did not vote to raise the debt ceiling, but rather did something a bit worse—voting to make it irrelevant.

Consider what will happen now. The Treasury will go on borrowing—as indeed it should—to cover expenditures already made with the approval of Congress. At some point in May of this year the issue will return. At that point the national debt will already have substantially exceeded the debt ceiling. What actions will be open to Congress at that point? They have authorized the excess, can they now refuse to raise the limit? The only alternative will be to once again suspend the limit for another few months and arrive back at the same position with the excess over the limit having grown much larger. The effect will be to make the debt ceiling totally irrelevant in the future, permanently depriving the GOP of what they once considered their primary leverage on the deficit.

The GOP made a big point of withholding pay from member of Congress if there is no budget from the Senate by May. This is pure theatrics, since by law Congress cannot change its pay during a session, but only for future Congresses. Furthermore a Senate budget proposal does not have the force of law and is merely a way of laying down a budget outline for appropriations committees. They have not required that the House and Senate agree on budget outlines at all. Smoke and mirrors.

RSS

Support Atheist Nexus

Donate Today

Donate

 

Help Nexus When You Buy From Amazon

Amazon

MJ

© 2014   Atheist Nexus. All rights reserved. Admin: Richard Haynes.

Badges  |  Report an Issue  |  Terms of Service