Archive for the “Size of Problem” Category

By Charles Hugh Smith

When some newly elected members of Congress declared their resistance to increasing the nation’s debt ceiling earlier this month, it set off a firestorm of frenzied warnings that a refusal to raise the limit on the U.S. debt would trigger financial Armageddon.

For example, Austan Goolsbee, the chairman of the president’s Council of Economic Advisers, said in an interview on ABC’s This Week, “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic.”

Treasury Secretary Timothy Geithner weighed in with a warning that failure to raise the debt ceiling would have “catastrophic economic consequences that would last for decades.” According to Geithner, the national debt is currently $13.961 trillion, and the legal limit for government borrowing was set by Congress last January at $14.29 trillion.

But shrill predictions of impending doom don’t shed much light on the issues raised by the debt ceiling issue, which could have serious long-term consequences for all Americans. So let’s start with the basics of the nation’s fast-rising debt, and why Congress has to keep raising the debt ceiling every year.

See full article from DailyFinance: http://srph.it/eFfRKo

Comments No Comments »

Up until World War I, the US government needed permission from Congress every time it wanted to borrow money from the public. In 1917, Congress passed the Second Liberty Bond Act which gave the U.S. Treasury a debt ceiling of f how much it could borrow from the public without seeking Congress’s consent.

Congress has raised the federal debt ceiling 14 times in the last 12 years.  But the rate at which these expansions have been approved has dramatically increased over the past 3 years.  Since 2007, Congress has raised the debt ceiling a total of six times, and appears they will need to do so again in March 2011.

Comments No Comments »

From the San Jose Mercury News

The United States just passed a dubious milestone: Government debt surged to an all-time high, topping $14 trillion — $45,300 for each and every person in the country.

That means Congress soon will have to lift the legal debt limit to give the nearly maxed-out government an even higher credit limit or dramatically cut spending to stay within the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea party activists and deficit hawks.

Already, both sides are blaming each other for an approaching economic train wreck as Washington wrestles over how to keep the government in business and avoid default on global financial obligations.

Bills increasing the debt limit are among the most unpopular to come before Congress, serving as pawns for decades in high-stakes bargaining games. Every time until now, the ending has been the same: We go to the brink before raising the ceiling.

All bets may be off, however, in this charged political environment, despite some signs the partisan rhetoric is softening after the Arizona shootings.

Treasury Secretary Timothy Geithner says failure to increase borrowing authority would be “a catastrophe,” perhaps rivaling the financial meltdown of 2008-2009.

Congressional Republicans, flexing muscle after November’s victories, say the election results show that people are weary of big government and deficit spending, and that it’s time to draw the line against more borrowing.

Defeating a new debt limit increase has become a priority for the tea party movement and other small-government conservatives.

So far, the new GOP majority has proved accommodating. Republicans are moving to make good on their promise to cut $100 billion from domestic spending this year. They adopted a rules change by House Speaker John Boehner that should make it easier to block a debt-limit increase.

The national debt is the accumulation of years of deficit spending going back to the days of George Washington. The debt usually advances in times of war and retreats in peace.

Remarkably, nearly half of today’s national debt was run up in just the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s.

With a $1.7 trillion deficit in budget year 2010 alone, and the government on track to spend $1.3 trillion more this year than it takes in, annual budget deficits are adding roughly $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

In a letter to Congress, Geithner said the current statutory debt ceiling of $14.3 trillion, set just last year, may be reached by the end of March — and hit no later than May 16.

Comments No Comments »

From the Financial Times

It was the most startling of warnings. If the US does not get its finances in order “we will have a European situation on our hands, and possibly worse”, claimed Paul Ryan, the new Republican chairman of the House of Representatives budget committee.

The consequences of not tackling the country’s mounting debt burden would be dire, he last week told an audience of leading budget experts and economists at a gathering in Washington. “We will have the riots in the streets, we will have the defaults, we will have all of those ugliness problems,” he said, referring to “French kids lobbing Molotov cocktails at cars, burning down schools because the retirement age will be moved from 60 to 62”.

As it stands today, the US borrows about 40 cents of every dollar it spends. Curbing the budget deficit has been the stated mission of Mr Ryan, a rising Republican star, for several years. But such calls for action have multiplied in Washington in recent months, igniting what some say is the fiercest debate over fiscal and budgetary policy in decades.

The risks are big. If the government rushes into austerity, cutting too much and too quickly, it could stunt economic recovery. But if the political system cannot forge some kind of consensus on steps to restore US deficits to sustainable levels, the danger is potentially even greater: a sovereign debt crisis in the world’s largest economy.

“It’s a weak period for the economy, so I don’t think you want to do serious deficit reduction anyway, but we are playing a dangerous game and we will start to pay a price for fiscal irresponsibility,” says Ethan Harris at Bank of America Merrill Lynch.

The big fear is that if no action is taken, investors might eventually punish the US for its fiscal laxity. That would raise borrowing costs for businesses and consumers, force severe austerity measures and risk social unrest. Not only America’s triple-A credit rating could be threatened; some point to consequences in foreign affairs and defence as well. Mike Mullen, chairman of the joint chiefs of staff, last year warned that the debt pile could limit the flexibility of the US in funding its military – in his eyes the “most significant threat to our national security”.

Read the rest of the article.

Comments No Comments »