Posted 4 months ago on Jan. 3, 2013, 8:55 p.m. EST by bensdad
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The debt ceiling has nothing to do with spending money - it has to do with the US government paying what it is legally obligated to pay because the House & Senate & President “contracted” to pay its bills.
With the national debt at its highest point in 50 years compared with the size of the U.S. economy, the debate about the ceiling has become entwined by th e Republicans in the larger issue about slashing the budget. The budget debate is shaping up around trying to balance two perhaps equally unpopular remedies: sharp cuts to popular government-funded programs and major tax increases.
Republican lawmakers say that if they raise the limit they need a commitment from the White House for more spending cuts. The Obama administration has resisted the idea of including spending caps or other budget-process reforms in legislation to raise the debit ceiling, arguing that ensuring the government’s solvency is too important to be held hostage to any other issues.
What happens if we don’t raise the debt ceiling but continue to pay interest on our bonds? This is an option known as “prioritization.” The Bipartisan Policy Center released a report attempting to think through how this would work in practice, as it has never been attempted before.
The raw numbers are chilling: In the August 2011 debt ceiling debate, the federal government would have to cut expenditures by about $134 billion, or 10 percent of the month’s GDP. If it chose, for instance, to fund ONLY Medicare, Medicaid, Social Security, supplies for the troops and interest on our bonds, it would have to stop funding every other part of the federal government. The drop in demand, when coupled with the turmoil in the markets and the general financial uncertainty, would undoubtedly throw the economy into a depression. Also keep in mind that we have to roll over $500 billion in debt , and if there was any uncertainty about how we were going to pay our bills, it is not clear we could find buyers for our debt at anything less than an exorbitant rate. In this way, “prioritization” could actually increase the deficit by billions.
What happens if we stop paying the interest on our debt? This is too scary to consider. Treasury securities sit at the base of the entire global financial system. They are considered so safe that the interest rate on Treasuries is called the “riskless rate of return,” as the market assumes there is no chance of default under any circumstances. Almost all other types of debt — mortgages, credit card, auto loans, business loans, hospital bonds, etc. — are yoked to Treasuries. Almost all major financial players hold substantial portfolios of Treasuries or Treasury-related debt in order to buffer themselves against financial shocks. Consider that the 2007 financial crisis was caused by the market realizing it had to reassess the risk of bonds based on ONLY subprime mortgages. If the market has to reassess the risk of US Treasuries, the resulting financial crisis will be beyond anything we’ve ever seen in this country or any other.
In 2012, the debt ceiling debate – that was raised at the last minute - caused our debt rating to be lowered – and interest rates we paid on our treasuries from 1.4% to 1.7% - an increase of 20%. If we actually do not raise the ceiling this rate we pay would be 5%+. Imagine what would happen to ALL variable rate loans!!!
In 1917, the debt ceiling was created during World War I. Over time, the debt ceiling has been raised every time the United States comes close to hitting the limit. By hitting the limit and missing an interest payment to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.
WILL OBAMA HAVE THE COURAGE
TO USE THE 14TH AMENDMENT:
There has been controversy over whether the debt ceiling is constitutional. According to the 14th Amendment of the Constitution,
"The validity of the public debt of the United States,
authorized by law ... shall not be questioned."
Obama, could use this power to just raise the ceiling.