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Here’s what would happen if the debt ceiling is breached

My friend and fellow RRStar blogger Ted Biondo seems to think that the media are making too big a deal about the possibility that Congress might fail to raise the debt ceiling (see HERE).

Ted argues that if Congress refuses to act, President Obama, on his own, could “simply pay the principal and interest on government debt before paying other federal obligations.”

But, of course, that’s not as simple as it sounds.

Ezra Klein of The Washington Post describes the options available to the government — and the consequences — THUSLY:

The choices it will face quickly become stark. It can cover interest on the debt, Social Security, Medicare, Medicaid, defense spending, education, food stamps and other low-income transfers, and a handful of other programs, but doing all that will mean defaulting on everything — really, everything — else. The FBI will shut down. The people responsible for tracking down loose nukes will lose their jobs. The prisons won’t operate. The biomedical researchers won’t be funded. The court system will close its doors. The tax refunds won’t go out. The Federal Aviation Administration will go offline. The parks will close. Food safety inspections will cease.

This is the difference between a debt-ceiling shutdown and a government shutdown. As Shai Akabas, a research at the Bipartisan Policy Center, puts it, “in a government shutdown, the government is shutting down future obligations. With the debt ceiling, They’ve already obligated the money. They owe these people the payments now, and they can’t make them.”

Then, of course, there’s the financial-market chaos. Trillions of dollars in derivatives and other financial products are based on the interest rate that the federal government pays when borrowing. U.S. government debt is, after all, supposed to be the safest investment in the world, and so it’s used to “benchmark” all other sorts of debt. A spike in the Treasury rate would mean a spike in credit card rates and mortgage rates, not to mention all manner of more esoteric financial derivatives. The damage to the economy would be tremendous, and it would occur at every level, from individuals looking for a loan to buy a house to hedge funders trying to play the markets.

Ted Biondo also seems to ignore the fact that Congress has routinely voted in the past to raise the debt ceiling without great controversy — until Barack Obama became president. Every president since Harry Truman has raised the debt ceiling. Ronald Reagan did it 18 times. George W. Bush did it seven times.

But today’s congressional Republicans are counting on the American people  misinterpreting the meaning of the debt ceiling.

Raising the debt ceiling only allows the government to pay the bills it already has incurred. It does not allow Obama or anyone else to spend even one penny that Congress has not already appropriated.

Spending bills emanate from the House of Representatives, which currently is controlled by a Republican majority. Obama simply is not free to conjure new spending programs without specific consent of the House (and concurrence by the Senate). To suggest otherwise is to lie to the American people.

But Republicans have, in fact, repeatedly lied about the matter in recent years. House Speaker John Boehner, among others, has said that raising the debt ceiling would give Obama “a blank check.” That’s pure rubbish.

 

 

 

 

 

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28 Comments

  1. Ted Biondo

    I haven’t verified all of your facts Pat at this time but your comment, “Ted Biondo also seems to ignore the fact that Congress has routinely voted in the past to raise the debt ceiling without great controversy — until Barack Obama became president” is not true.
    When Bush was president, this is what Senator Obama said when Bush wanted to raise the debt ceiling.
    “The problem is that the way Bush has done it in the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5T from the first 42 presidents. No. 43 added $4T by his lonesome. So we now have over $9T of debt that we are going to have to pay back. $30,000 for every man, woman and child. That’s irresponsible, Thats unpatriotic.”
    So much for no one making a big deal before Obama was president, our current “unpatriotic president” by his own words, has raised the national debt to $16.4T, almost double what Bush did and Obama did it in 4 years!

  2. Ted Biondo

    Besides Pat, the country can’t keep spending money it doesn’t have! When does it stop? How high does the debt have to go before we default on all the things you mentioned in your post?

    All future taxes will be going to the entitlement programs and interest on the national debt. Funds for education, national defense, etc. will be crowded out by the government competing with our own businesses for credit, jobs will decrease, etc.

    Our kids will have to pay back our debts by Obama’s own words as a Senator, only now the amount is over $50,000 for each man woman and child. It has to stop and we have to stop it while something can still be done about it. NOW – WHATEVER IT TAKES are the liberals will continue to spend and spend until it’s too late!

  3. Ted: I’ll grant you that Obama’s rhetoric when Bush wanted to raise the debt ceiling seems especially hypocritical today. But then, so is the rhetoric of today’s Republicans. The fact remains that there wasn’t much of a fuss about debt ceiling stuff before Obama became president, despite his own rhetoric when he was a freshman senator.

    The fact also remains that breaching the debt ceiling would be a disaster, which is the principal point of my post.

  4. Ted: Two questions:

    1. Do you agree that raising the debt ceiling merely allows for honoring debts already incurred by Congress and does not allow Obama to spend anything that hasn’t been approved by Congress.

    2. Do you think Congress should refuse to raise the debt ceiling and thereby bring on default?

  5. Ted Biondo

    Continuing to spend the country into certain default is just as bad, Pat. This deficit spending by both Bush and Obama has got to stop and there’s no time like the present.

  6. danimal

    5t vs 16.4t

  7. Ted Biondo

    Raising the debt ceiling would allow Obama and company to continue to increase spending on other programs getting to the debt ceiling even faster the next time before the existing debt owed was even paid off because O&C would have to borrow more causing the debt to rise even faster and higher.

    The debt itself will ultimately bring on the default when no one will loan us money, or if Bernanke keeps printing money to purchase our own debt – Let’s fix it now!

  8. Ted: The question remains as to whether Congress should refuse to raise the debt ceiling, which would bring about a calamity.

    I honestly think that some of those Tea Party kooks in Congress don’t even understand the meaning of the debt ceiling.

  9. Interesting factoid: From 1960 to August 2011, Congress voted 78 times to increase the debt limit, 49 times under Republican presidents and 29 times under Democratic presidents.

  10. danimal

    Were we 16.4t in the hole in 1960?

  11. @danimal

    We have been at close levels of debt as a percentage of GDP previously, specifically after WWII. We are at or near that 120% number again. We also sold war bonds previosly to fund our wars……

  12. “Every President since Harry Truman has added to the national debt expressed in absolute dollars. The debt ceiling has been raised 74 times since March 1962,[1] including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush and three times (to August 2011) under Barack Obama.”

    This is not a partisan issue. Raise taxes, cut spending, and start working on taking this down. Obviously default is not a good option, so I don’t know why this debate occurs so often. Sell debt bonds instead of war bonds to the American populace. I don’t care, but $50,000/person is a scary number no matter what party you are aligned with.

  13. The debate occurs so often because fiscal conservatives are trying to use it as leverage to force actual spending cuts. Not decreasing the rate of spending increases but actual honest to goodness spending cuts.

    Taxes have been raised. That is the easy part and the least effective part to achieve.

    It is the spending cuts that are not going to be easy to achieve.

  14. doc calls the right-wing wackos “fiscal conservatives.” That’s funny.

    Some of those Tea Party clowns can’t even correctly pronounce “fiscal.”

  15. danimal

    CJR1: Great research, but 5tril to 16.4tril in one administration. Come on!
    Our children are going to inherit this to whom had no part in say or had no vote.

  16. Boy Pat,

    I thought you said this wasn’t a partisan issue?

    You are the proverbial old dog. Always part of the problem, but refusing to participate in the solution.

  17. The National debt? Don’t worry about it.

    We not only live in the riches country in the world we own a money tree. Every dollar that leaves this country must eventually return if the bearer wants goods and services in exchange for it. Countries with American dollars and no desire to spend them for our products instead lend them back to us. Japan and China have a trillion dollars each in our paper sitting around doing nothing but gathering more paper. That paper might just as well be burned in the trash for all the worth it means to countries not willing to buy our goods. It will never be spent here.

    It is just like having a money tree. We buy a car or tee shirt from overseas and the money comes right back to us in exchange for our paper. It was President Jimmie Carter that started the ball rolling. He wanted to see more nuclear plants built so he came up with the bogus idea of telling us that the oil will be all used up before the end of the nineteen nineties. So out we went and bought Japanese cars and flooded Japan with dollars. Ronald Regan saw the problem with that money sitting doing nothing and borrowed it back to pay for the Cold War. Then President Clinton came up with the bright idea to exchange our production technology for foreign customers. That created a boom in Chinese products here, but the exchange never came to pass. China has no use for our products. That presented President Bush with the problem of moving the Chinese dollars and he borrowed them back to pay for a war and the Medicare Drug Program. Those dollars today are helping us dig out of a depression.

    So let the bugbears go back and fourth in Washington to their hearts content… and don’t worry about it… unless the bugbears decide to eliminate the SS Trust Fund Debt (three thousand billion dollars) then get out the thirty shot magazines.

  18. I think that before anyone blames the current administration any more or less than any other they should also read this:

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/28/republican-national-convention-the-one-graph-you-need-to-see-before-watching/

    The extreme elements in both parties are just hurting America. We came back from greater debt after WWII, I don’t see what the huge deal is all of a sudden. It is time for moderates to take back America from the fringes. Please.

  19. Craig Knauss

    danimal,

    What’s this $5T and $16T stuff? Are you talking about the national debt? If you think it was only $5T when Obama took office you need serious rehab. It was about $11T when GWB left. Look it up. GWB added at least $5T to the debt himself.

  20. danimal

    I am not just singling out the 0bama admin., I have NO love for Bush either. We let the cash tyrant have 2 terms as well, tied into revenge and intervention. Afterwards, we were seriously broke and felt that something needed to be done. We were promised a change yet were delivered more debt. My problem is that within this 4 year period it has NOT improved and we still left the same managers in charge. They continue to borrow and spend. We are repeating ourselves.

  21. danimal,

    How would you handle the glut of dollars held by China and Japan that they do not wish to spend here? And the dollars that retirement programs have that they want to place their dollars where they are not guaranteed a return?

  22. And the retirement programs that wish a guaranteed rate of return?

  23. danimal

    HenryB,
    I couldn’t tell you how, and for that matter I don’t believe that they could either.
    This is more poor management and nobody is winning.

  24. That is not an answer. I’d do the same damed thing. I’llbet you would too.

  25. danimal

    HeneryB,
    So we are winning and we couldn’t be better off?

  26. As long as there is idle money to be had there will be a treasury note to sop it up. Some of us are using the issue to attack the Social Security Program. For some weird reason almost half of us resent its existence (even a lot of old people, wierd). It is probably because us old people have stashed some of our earnings away for a rainy day and the stash has grown big time.

    The government owes us old people three thousand billion dollars and it accrues at 4.5% interest. Last year the interest amounted to 150 billion dollars. After using 40 billion of the interest money to pay for the difference between payroll tax income and SS check payout the account grew by a hundred billion dollars. It grew a hundred dollars the year before that, and the year before that. The program has always been a pay-as-you -go enterprise and the interest on the debt is part of the payout as it should be as long as there is so much of it available. It will always be pay-as-you-go unless the avarice among us manage to get their way. The coca mammy argument that the program will run out of money does not hold water.

  27. The government began borrowing from the Social Security Trust fund before I was born seventy six years ago. President Roosevelt was the first to tap it. It helped for the Second World War. Don’t go dumping on any administration for doing the borrowing they all do it.

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