What it means to reach the debt ceiling.

Discussion in 'Economics' started by S2007S, Apr 13, 2011.

  1. S2007S


    Interesting article that shows the amount of cuts needed each month to help extend the ongoing talk of raising the debt ceiling. I still question why they are wasting their time talking about raising the debt ceiling when its a given fact, 100% fact that its going to be raised. Why dont they just come out tonight and say they are raising it and just get it done with, we all know they arent going to cut back spending anytime soon so why even bother talking about it now, just raise the debt ceiling to $100 Trillion and forget about it for another 10 years or so....

    Reaching the Debt Ceiling: What It Means
    'Extraordinary measures' can extend limit about eight weeks.

    By Katy O'Donnell
    Wednesday, April 13, 2011 | 1:45 p.m.


    Right now, the federal government has to borrow an additional $125 billion per month to finance all its commitments -- from troops in Afghanistan to Social Security and Medicare benefits for the elderly.

    What would happen if the government wasn't allowed to borrow any more money?

    As the federal government once again approaches the $14.3 trillion debt ceiling imposed by Congress, leaders in both parties agree that a refusal to raise the debt ceiling would have catastrophic consequences.

    But with the GOP vowing to fight an increase in the ceiling unless Democrats agree to much deeper cuts in spending -- "trillions rather than billions," Republicans say -- the possibility is more concrete than perhaps ever before.

    Treasury Secretary Timothy Geithner has said the government will hit the ceiling on May 16, though officials say they can stretch that deadline until about July 8 by juggling the government's finances.

    But at some point this summer, the government hits a wall. If it can't borrow about $125 billion a month, it will have to begin reducing its spending by that amount -- immediately.

    To put that in context, the ferocious haggling to prevent a shutdown last week was over a mere $38.5 billion in cuts for this entire fiscal year.

    Here's another way to look at the spending cuts that would be required: They would total more than the combined amount that the government spends in an average month for the Pentagon, the wars in Afghanistan and Iraq, and Social Security benefits to tens of millions of retirees.

    Much of the political debate over the debt ceiling has focused on the catastrophic effects of a potential default by the U.S. on its debt. Interest rates would skyrocket as investors panic, in the U.S. and around the world.

    To prevent a default, Sen. Pat Toomey, R-Pa., has introduced legislation that would force the Treasury to keep up interest payments to its creditors before paying anything else.

    Toomey and some other Republicans argue that the U.S. can avoid a default fairly easily, because interest payments to creditors amount to only about 6.5 percent of federal spending. By contrast, tax revenues cover about 67 percent of all government spending.

    But avoiding an official default is only a small part of the problem.

    As Geithner warned in a letter to Toomey on February 3, defaulting on domestic commitments would be just as damaging to the nation’s creditworthiness in global markets as actually defaulting on interest payments, because “the world would recognize it as a first-ever failure by the United States to meet its commitments.”

    Markets and ratings aside, the effects of losing borrowing ability for domestic spending would be catastrophic.

    In addition to the magnitude of the required spending cuts, the government would have to deal with huge swings in its month-to-month deficits.

    Federal receipts vary dramatically from month to month, with big inflows around April 15 and when taxpayers make quarterly payments. Receipts last month, for instance, totaled $150 billion last month, and the monthly cash-flow deficit was about $229 billion. But in other months, the shortfall is less than $40 billion.

    If Congress doesn’t vote to raise the debt ceiling by the time it is reached in May, there’s a roughly eight-week grace period before spending stops cold, thanks to elaborate accounting tricks Treasury can employ to give itself headroom.

    Still, Geithner stressed in an April 4 letter to Senate Majority Leader Harry Reid, D-Nev., that the so-called “extraordinary measures” available this time around are limited, compared to previous budget impasses, because the debt is growing at a much faster rate now than it was when accounting was used to avert defaults in 1985, 1996, and 2003.

    Treasury’s first move would be to suspend sales of State and Local Government Series Treasury securities, normally issued to help state and local governments comply with federal tax laws when they have cash proceeds to invest from their issuance of tax-exempt bonds. Suspending sales would eliminate the increases in the debt caused by issuing those securities, but it would be disruptive for already-struggling states and municipalities.

    If the debt limit is reached, Treasury also has the authority to declare a “debt issuance suspension period” on its investments to the Civil Service Retirement and Disability Fund. Treasury would then be able to redeem some existing investments in the fund and suspend new investment. Civil service benefit payments would continue to be made as long as the extension measures weren’t exhausted.

    Treasury could also suspend daily reinvestment of its securities in the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan, and it could also hold off on daily reinvestment of its securities in the Exchange Stabilization Fund.

    Those measures would give the Treasury a $230 billion cushion, postponing D-Day on the debt ceiling until July 8.