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Wednesday, January 19, 2011

What is the Debt Ceiling?

First off, it is a ceiling we bump up against every few years and it has to be raised. The choice is whether we go off the cliff or survive to fight another day. Sort of like early 2009 when the Treasury and Federal Reserve were guaranteeing and buying everything in sight to prevent another Great Depression. Basically, bumping up against the ceiling presents a great opportunity for our elected officials to pontificate against excessive spending and the need to live within our means as an interlude to their spending like crazy.

Currently the ceiling  is at $14.3 trillion. Treasury Secretary Geithner needs it raised because he is the one doing the borrowing, and he has the spectre of a U.S. default if it isn't. Rating agencies even talk of lowering the credit rating on U.S. debt. We all know how well they've done their job in recent years.

Again, this three-ring circus of raising the limit happens every few years; and when it does, Treasury bond holders look at each other and wonder if the U.S. could default. These days this includes the Chinese and others who have lent us the money by buying Treasury bills, notes, and bonds so we could buy their goods. On occasion, these debt ceiling episodes have been like the final seconds of a NCAA final four game with the ball bouncing on the rim. But, the fact that we are still here and haven't gone the way of Iceland, or Ireland for that matter, tells you our elected officials have always raised the limit so they can go on with their spending.

Usually, all of this is good to get politicians really good sound bites and bond holders blood pressure rising. This time is, however, a bit different because the partisanship has ratcheted back up and the Republicans are desperate to be seen as tightfisted with taxpayer money. Furthermore, the federal deficit exceeds $1 trillion and other countries, importantly those holding our debt, are questioning our fiscal management.

IMHO, there is no question that it needs to be raised. The American people, I believe, would prefer that Congress increase it without a lot of fanfare - but realistically, as long as there are cameras and microphones we know that won't happen. Nevertheless, holding down the rhetoric would be greatly appreciated. Most importantly, a line in the sand should be drawn. Barring a major war or a significant spike in the unemployment rate, the debt limit should not be increased further. To approach the level of GDP is ludicrous. Today we have prime 21st-century examples of what happens to countries whose debt gets out of control.


  1. Realistically, the debt ceiling must be raised. It would be nice to see some real spending cuts come along shortly thereafter.

  2. Exactly. Raising the ceiling gives them time and public officials should go on record, including the President, and say this is it. Then the cutting should start. Waiting until we are in a crisis is dangerous.
    I believe the mistake we made was running a record deficit before the housing crisis. Then when we really needed to borrow it got seriously out off control.
    Sort of like a family running up credit card balances and then losing a job.

  3. Why hasn't the defense budget of 800 billion dollars substantially cut yet? substantially as in 30%+? There's so much money that could be saved right here for a start.

    Was the war in Iraq really worth it? Thanks to this intervention one of the oldest Christian communities in this region have been wiped out!

    Too bad there is no political will to tackle the deficit/debt yet, it will take a financial earthquake before that happens.

  4. Nevertheless, holding down the rhetoric would be greatly appreciated!

    I agree. If you raise it but simultaneously reduce spending, you can at least silence some critics. I think the posturing is partly deserved because we have not been spending with restraint.

  5. @Beating The Index Tough questions. The powers to be have decided we need military all over the world. It's expensive. Especially when you think how those resources could have used for other purposes such as education, health etc.
    We had a balanced budget not long ago and the Fed Chairman at the time, Greenspan, worried about eliminating the national debt because then he would lose the most important tool of monetary policy. Then of course we went on a drunken sailor's spending spree.

    @Shawn The problem in a nutshell is that both of these are vote getters. Bring money to a community (even a "bridge to nowhere") and it is a vote getter. Get on TV and pontificate for about wasteful Washington D.C. and it is a vote getter. Thus, I expect we come to the brink, Congress does a lot of talking, editorials are written on what would happen if the Treasury can't hold an auction or make an interest payment and the debt ceiling will pass at the last minute.
    At least that's my take.

  6. Good thoughts, DYI. The fanfare is distracting. Just get on with it. The debt ceiling will be raised again and again until extreme financial pain dictates otherwise. Japan is near or past 200% of GDP, but their debt is held internally by the Japanese themselves. US debt is not.
    There seems to be little benefit to the vast majority our congress people to take a stand and do anything different.