Thursday, October 10, 2013
With a week or so before the “deadline” to raise the debt ceiling, the rhetoric has reached epidemic levels. President “No Drama” Obama said earlier this week that not raising the debt ceiling would “be like a nuclear bomb” going off economically. Total annihilation and an inability to sustain life for centuries is what will happen if the credit card limit isn’t raised? Some Republican leaders are saying it doesn’t matter if the U.S. pays its bills, and, in fact might be a good thing to “default” on America’s obligations. Once again the “leadership” of the country froths and spews, but doesn’t solve problems.
Congress – Republicans and Democrats – voted for certain spending levels that exceeded the income that would be coming into the US Government as part of the budget process. Much angst and drum went about those negotiations, but ultimately there was an agreement, though nobody was happy. Costs were incurred and spending followed the plan. Now the bill is due. The debt ceiling is only to pay for prior costs incurred, it’s not authorizing new spending or new debt. Everybody agreed to deficit funding, so it’s bizarre now to have some balk at the law of the land. Stranger still is that the increase of the debt ceiling isn’t part and parcel of the budget process – if everybody agrees that $1 trillion will be spent beyond what’s brought in – then right then and there the debt ceiling should be raised because it’s part of the plan.
In the event that the political establishment is not able to come to agreement on what had already been agreed to, and the debt ceiling isn’t raised to cover costs already incurred - doesn’t mean that no money is coming in to Government coffers. Approx. $1.30 is spent for every $1 that comes in. That $1 is still coming in.
The Treasury Secretary must make decisions on how to spend the money. Congress has authorized spending in excess of what is earned, so it’s up to the Treasury Department to decide which bills to pay. Would the Treasury Secretary not pay the interest on the debt and put the country into actual default? Doubtful as it would be a violation of his Constitutionally sworn duty to uphold the full faith and credit of the United States.
Interest on existing U.S. debt represents about 18% of spending. If you factor out the portion of the debt that is owed internally (to the Social Security Trust Fund, and other U.S. interests) what actually has to go out in cash to meet debt obligations is fairly small…maybe 6%. Given that the money will be there the priority should go to keeping the credit worthiness in tact – even if it means losing political advantage.
Social Security, Medicare and a few other entitlements would likewise be funded to prevent America Fall (our version of Arab Spring). Discretionary spending would take a hit as would some military spending. Would this be a good way to balance the books? Smart? Without question, NO. It’s the least attractive way to manage the finances of any family, any organization or any country. But would the world as we know it end if in a week’s time the U.S. had to spend only what it brought in? No, it wouldn’t. Claiming that it would only further deteriorates the trust in democracy.
Congress felt the pain of the 800,000 Federal Workers who were furloughed (out of 2.8 million - or 28%.) The House has voted so that any worker who was furloughed will receive 100% of their pay retroactively. These workers are being paid not to work. There is, once again, zero consequence for something happening. Banks that took risk and made bad loans? Government was there to cushion the pain. Auto companies that avoided market conditions? Government was there to save the day. Workers not being paid for not working? Government promises that it'll make everybody whole. At the very least if a worker is going to be paid they should actually do some work! (I'm such the radical.)
President Obama warned of catastrophic consequences if the “sequester” kicked in. Republicans warned of Armageddon if the Affordable Care Act went into effect. Neither was the case, though there's plenty of problems with both of those examples. Now the media and political elite are foaming about default, which won’t happen in any way shape or form unless the Treasury Secretary is derelict in his duty and wholly and totally incompetent. Can’t we just furlough the hyperbole and fulfill what was already agreed to?