Debt Ceiling: Please Explain

It’s never really happened before, because the minority party has never held the debt ceiling hostage like this before. This is a good article, citing a study by the Bipartisan Policy Center led by George H.W. Bush’s undersecretary to the Treasury, explaining what it will look like. Essentially government spending in august would probably drop by about 35%. It could genuinely be a serious shock to the economy, and Wall Street is supposedly terrified about it happening and giving Republican leaders in Congress a lot of heat through back channels. For that reason I don’t think there’s a chance it won’t happen, but the Tea Party and the Republican base is dead-set against doing it in any circumstances so it’s concerning.

The debt ceiling isn’t automatically increased, period. Inflation has nothing to do with it. Trying to tie inflation to debt is meaningless. If we had runaway inflation, increasing the debt ceiling would be pointless as no one would lend us any money anyway. The debt ceiling rises when congress authorizes an increase, period.

The Republicans threatened to not raise the debt ceiling in 1995, and eventually the government shutdown after President Clinton vetoed a spending bill, so not exactly the same thing, but a similar political squabble over funding the government.

At the moment, the government of Minnesota is shutdown due to a budget impasse.

Only congress has the authority to issue debt. It makes some sense to place a limit on issuing debt without getting approval first. Nearly every company requires a corporate resolution in order to issue new debt. You can’t get a commercial loan in this country without providing evidence that the board of directors of the company has authorized the new debt issuance.

It shouldn’t hold the full faith and credit of the country hostage to not issue any new debt. Granted that it potentially does now, but that is only because our debt load is so high that interest expense is a massive portion of the budget and that plus our mandatory expenses exceeds the revenue we bring in.

Also, the reason Republicans are able to hold the country hostage, as you say, is that they are not the minority party in congress. The are the majority party in the House and the minority in the Senate. You could just as easily say that the Democrats are holding the country hostage.

Sure, and it’s called the budget. You know, where Congress decides how much to spend and on what, and how much to raise via taxes. If the spending is more than the taxing, then Congress has already approved borrowing the money. A separate debt ceiling is just dumb.

The impression I get from the news is that we’re always increasing our debt limit because the government is constantly spending way more than it should, and there’s something wrong with a constantly increasing ceiling. I’m not concerned with runaway inflation. Is increasing our debt limit primarily to compensate for inflation? A whole lot more?

I don’t disagree that by simply passing a budget that has a deficit in it you are implicitly authorizing an increase in the debt. There certainly is a sense of repetition in the process. However, they are separate although similar acts. It’s possible, for one example, that they may need to issue more debt than is predicted by a budget deficit. It seems there should be some mechanism for approving additional debt issuances. Further, the concept of the debt ceiling was put in place to fix the problem of congress needing to authorize every single debt issuance.

I think it should get raised. I do think that this is a very scary game of seeing who will blink first. I also think that there is a need for major reform as we simply have too much debt (including the contingent obligations). Republicans should accept some smaller version of spending reductions $1-2 trillion. THat would get us through this.

Good One! Made me smile!

The debt ceiling has essentially nothing to do with inflation. And there is nothing wrong with the concept of an eternally rising debt ceiling. We could do away with the concept entirely, or sidestep it as I mentioned earlier.

For a while under Clinton, the U.S. was running a surplus. We spent less than we took in. The debt ceiling does not have to be raised under those circumstances, even if there is nominal inflation. (There was, and almost always is.)

I don’t want to get into the usual ideological quagmire, but the combination of the dot.com bust, the loss to the economy after 9/11, the decision to invade Afghanistan and Iraq, and the lowering of the top income tax rate all hit more or less simultaneously under Bush. The surplus went to a deficit. And the way the government finances a deficit is to increase borrowing. Therefore the total amount of debt increased every year. This was more or less manageable until the recession undercut the economy. About a trillion dollars in government revenues vanished from fiscal 2008 to fiscal 2009. The shortfall has actually decreased somewhat in more recent budgets, but still runs over a trillion per year. That adds up very quickly. A three trillion dollar rise in the debt ceiling is therefore only a two year fix. That’s why Congress has to address this so often.

Because everyone knows that there is a real debt ceiling that no one wants to hit. The real debt ceiling is when we’re so far in hock that people lose confidence in us, and stop lending us money. We don’t know where that point is exactly; we may have a ways to go, we may be quite close to it. Nobody knows. But if/when it does arrive, it’ll be very, very ugly.

The phony debt limit is a way to keep reminding ourselves that we don’t want to hit the real debt limit. We keep moving it, like the credit addict who keeps saying “okay, just this one last pair of shoes (which I totally need) and then I’ll start paying down my credit cards.”

Here’s one. Beware, though; it cuts both ways.

That’s actually how it works most of the time. Had the House not gotten rid of the Gephardt rule (as they did in 1995), that’s how it would have worked this year, too.

No, the Republicans have also demonstrated with unprecedented frequency that you CANNOT get anything done in the Senate without 60 votes. So it only takes 41 to hold the country hostage. Since from a partisan perspective, making sure nothing gets done is in the GOP advantage, especially regarding ANYTHING, even GOP initiated proposals, that Obama supports, all it takes is 41 to completely undermine the workings of the government that GOPers assert cannot do anything effectively.

Nice little feedback loop, that.

I don’t understand. Every dime the government spends has already been authorized by Congress. It’s not a very good analogy but a better version of it would be for the directors of the company to authorize new debt issuance, and provide evidence for it, and yet still be required to authorize a ‘debt ceiling’ increase every year to account for those loans. It makes no sense.

Yes, as you say, refusing to raise the debt ceiling unless demands are met holds the full faith and credit of the country hostage, because the country has a large amount of debt and a large deficit. That debt has been accumulated by both parties, and it exists.

I don’t want to get into a political debate, but I think this is actually a question of fact: Democrats aren’t threatening to refuse to raise the debt ceiling. Not a single Democrat has said that. Democrats are happy to vote for a “clean” debt ceiling increase tomorrow if Republicans would go along with it. That’s what Nancy Pelosi has been pushing for for a long time now. It’s the Republican party, and them alone, who have threatened to refuse to raise the debt ceiling unless their demands are met, which is what has created the “hostage” scenario. Granted Democrats are not willing to give in to all of the Republican demands unless they get some concessions in return; but refusing to accede to the hostage-taker’s demands doesn’t make you a hostage-taker yourself.

This Globe and Mail opinion piece says that a failure to raise the debt ceiling would essentially result in an erosion of trust in the US’ financial securities, causing higher interest costs.

Thank you. Good to know.

I’m sure you could find someone who has tried to run these numbers, but I would warn against looking at them. Even thinking that way is a huge mistake. As others have said, governments are just not the same as households or corporations. Comparing apples and oranges can lead to faulty conclusions.

One example: US debt exists in the form of Treasury bills. These form the basis of conservative, safe investments around the entire world. A corporation with no debt is in excellent shape, but you could argue that a country with no debt is actually doing a disservice to the investing public.

Another example: The government can print money, which effectively changes the value of that money and of all existing debts and assets. While this is generally bad for the country and economy, it’s an option that isn’t available to a corporation or household in any form.

A better comparison would be to look at US debt as a % of GDP and compare that to other countries ( http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt ). What you’ll see is that the US is a long way from being Greece.

This graph shows when the debt ceiling was raised and by how much. Basically it gets raised by however much it needs to to cover the extra debt the country is taking on. It rocketed way past inflation levels under George W. Bush and Obama because the country has been taking on debt at a much faster than inflation, but for the last few years of the Clinton administration it didn’t get raised at all because the budget went into surplus. Raising it has always just been a formality, until this year.

FYI: I’m pretty sure that graph has the Senate party in control colors reversed

Of course you can. The question is whether the bank accepts it. If the bank thinks “You’re a good customer, we make a lot of money from the high interest rates, the new extension will be even better, and his business is solid, so he won’t default, in fact, he needs the raise of the debt to expand his business” - then they will smile and say “Yes, of course! Here’s the new contract!”

If the bank, on the other hand, looks at you and thinks “Well, we made some good money, but now his business is crumbling, he’s laid off his workers - looks he’s going belly-up, no way we’re throwing good money after bad, we want as much as we can get before he’s bankrupt”, then they will say “No way, pay up you deadbeat!”

So it depends entirely on how trustworthy you appear to the bank, what your income situation is, and how big a customer you are. You know, like in the old joke: If you owe the bank 100 000 dollars, you can’t sleep at night for worry. If you owe the bank 10 mill. dollars, the bank can’t sleep at night for worry.

(I used a hypothetical business and not a private person because a state is more like the former than the latter. Still, even with a private person it’s possible, just less likely.)

Most of all it depends on how tight or greedy your bank is: if they want as much profit, they will happily raise the ceiling and extend the deadline against higher interest rates.
If the bank is more conservative and worried about defaulting, they will deny.

With countries, this happens regularly, too, it just doesn’t get big headlines unless the stakes are high. Most countries have such high debt that they can’t pay it off in one year, anyway, so the debt is rolled over, that is, re-issued. Part of the interest has been paid, maybe some debt paid off; and the remaining debt plus interest is packaged into a new deal with new deadline and new rates.

As long as the economy of the country is booming and taxes incoming to pay part of the running interest and pay back a little of the debt itself, the credit givers don’t worry, only if suddenly things crash and the country as a whole could default do the creditors start worrying.

The same is happening in Greece: they are in such a bad shape, that they get only short-term credit at sky-high rates, that’s why there’s a conference every couple of months, because the deadline has run out and things haven’t improved.