Say that Congress actually sticks to a debt ceiling without caving in. The US government is running out of money near the end of the year. Couldn’t it simply shut the doors on some non-essential services for a couple weeks? Is such a plan already in place?
It’s happened before, most notably in 1995, where a stand-off between Republicans who controlled Congress and President Bill Clinton led to a failure to pass a budget. Parts of the government shut down, and Clinton is thought to have won the battle of public opinion that resulted from the clash.
The US Government has indeed shut down all “non-essential functions” several times due to not being able to pass a Spending bill.
In the event of the debt bumping up against the debt ceiling, the Treasury has some acounting games they can play before the government has to default or start shutting down services. They can suspend the auction of debt instruments, and stop issuing securities to federal workers’ retirment funds. Since raising the debt ceiling is such a political hot potato, Treasury has had to engage in such manuevers serveral time in the past.
Previous thread exploring the same topic in considerable detail.
Why can’t they just “print” more money? I know that’s really bad but it seems it could be done in a pinch.
Well, because as you said, it’s really bad. The negative consequences would be greater than just having to shut some stuff down, as was done in 1995.
Germany tried this in 1923. It also ended “really badly”.
The answer is that simply printing money results in inflation because the buying power of each dollar printed decreases. And actually, when the Fed raises and lowers interest rates, what it really is doing is raising and lowering the supply of money in circulation. Money is really created by banks. When you put $100 into a savings acount, the bank loans $90 of that out. If interest rates are %5, the banks receive the original $90+$4.50 interest back. Total money = $104.50.
So when the economy heats up, the Fed raises interest rates, discouraging people from taking out loans creating less money and lowering inflation. When the economy slows down, they lower rates encouraging borrowing.
Anyhow, the US government doesn’t really run like a business where it needs to be profitable. There’s a whole complex interaction between the economy, interest rates, the value of the dollar, taxes and spending that I’m too lazy to go look up in my old Econ book.
The short answer is that as long as the US continues to have a relatively healthy economy, some degree of deficit spending is ok.
Most money isn’t printed. Actual currency represents only a small percentage of the amount of money in existence.
But you probably already knew this. I assume what you’re asking is why the government can’t just fudge the figures and keep on doing what it’s been doing. The answer is that the government does this all the time - it’s the basis of deficit spending. The government wants to spend more money than it collects via revenue. So it makes up the difference by borrowing and going into debt. The actual mechanism is the sale of treasury bonds.
As you noted, a little bit of this isn’t too bad. The problem is that we’ve been doing a lot of it for a long time.
Printing money isn’t the issue here, nor is deficit spending. The OP asked what would happen if the federal government reached its spending limit and Congress failed to do anything about it, not what would happen if the federal government failed to print enough currency or failed to issue bonds. The answer lies in the fact that the federal government isn’t allowed to spend any money without authorization from Congress, regardless of how much currency has been printed or how much money could be raised through bond sales.
As mentioned by others here, this has happened before. In 1995 many federal government agencies were shut down temporarily. I believe existing law kept some agencies open on an emergency basis, but for example, the INS didn’t operate during this period. The company I worked for at the time had an employee on an H1 visa who had temporarily left the U.S. and couldn’t get back in until the budget crisis was resolved. I know someone who was a HUD employee who didn’t work during that period.
I agree. I was addressing timmus’ post not the OP.
Apart from the disastrous economic consequences, the government doesn’t print money - the buearau, the beaurau, er the BPE does, via the FED - via the banks - the money has to be borrowed, interest paid, etc. It’s (thankfully I suppose) not that simple.
I initially was going to respond this way, too. But read the OP a bit more carefully. The word “spending” does not appear in it.
The OP asks about a DEBT LIMIT, not a spending limit. Theoretically, the government could continue to spend without incurring more debt by creating money.
I think many people here are misreading the question. In 1995, the government was NOT shut down because the debt limit was reached. The government (or parts of it, really) shut down because appropriations bills were not passed into law in a timely manner.
There would be several predictable effects of the debt limit being reached and not increased, and many more indirect effects that are probably much more serious. Day to day operations of the government make up roughly a third of the federal budget. If the debt limit were reached, all of this would stop. Various entitlements, like Social Security, Medicare, and so on, are something more than half of the budget, and this would stop, too. All the government spending each year amounts to something like 20% of our GDP, and it would all stop. Those are the direct effects.
The indirect effects are equally real, but harder to predict. The US would default on its debts and be unable to pay interest on the debt, which is something like 15 or 20% of government spending. A heck of a lot of people and institutions hold this debt, and what they would do with questionable bonds is to some degree a matter of speculation. Some people might hold on to their bonds thinking, eh, the US will change its mind and increase the debt limit sooner or later. Others may think our government has gone nuts and try to sell the debt while they can. Suffice it to say, when economically weaker countries have defaulted on debts, they have had terrible consequences in banking, monetary, and other sectors.
Would that chaos be unleashed on the US? Economists may disagree about the degree or economic trouble, but exceeding the debt limit would be far more serious than simply furloughing government employees for a few days or weeks.
The Social Security Trust Fund is currently taking in more money in payroll taxes than its paying out in benefits, with the balance required to be invested in special Treasury bonds. In my woefully inadequate understanding of entitlement finances, a bump up against the debt limit would not affect current Social Security payments, but would prevent the fund from purchasing more bonds thus eliminating the future interest that would have been earned on those bonds. I have no idea what they would do with incoming surplus payroll taxes at that point – bury it in a coffee can in the backyard, I guess.
These are two different tools available to the Fed.
The Fed has significant control over the circulating money supply. Their periodic policy meetings include some decision regarding how much money to insert into the national supply (by selling bonds the Fed owns) or remove from the supply (by buying bonds).
The Fed also controls their own interest rate that they charge to banks, which influences the Federal Funds Rate, the interest rate (price) that banks charge each other for overnight loans. Changes to the Fed’s rate affect the FFR, which usually affects all other American interest rates. (Not always, though – sometimes the FFR may go up and the consensus Prime Rate will go down at the same time.)