Tuesday, June 21, 2011

The Debt Ceiling and Politics

There's alot of talk about August 2nd.  That's when the USA reaches its debt limit.  The charge card is full, maxed out. Now what?

Two things are possible. The first is that the US defaults on its debt obligations. We don't make our interest payments to the Chinese, Japanese, and most of Europe. Even Russia holds our debt. Debt in the form of US Treasury Bills (Govt. CD's) and Collateralized Mortgage Obligations (CMOs) which are bundles of, you got it, home mortgages, some surely right here from mid-Missouri.  No one likes to hold loans and not get payments, so the World dumps our debt on the open market. Value of our debt plummets causing our cost of our borrowings to go from about 2% to about 8% our budget deficit would grow from $1.6 Trillion to about $4 Trillion per year. The higher interest rate would crush our economy and nation. Bread would cost $25 per loaf. Austerity measures like those being imposed in Greece would come home to the USA. Higher taxes, layoffs and huge reductions in US Govt. services.

Even without this scenario, we are only paying the interest on our debs today. We aren't even thinking of repaying any principal! Think of a credit card you can't even make the minimum payment on, which includes some principal. It's never paid off.

Scenario two:  The US hits the debt ceiling, and like most folks when expenses don't equal the checkbook, you cut non-essential spending. You don't pay the bills that don't have to be paid.  The USA would close parks, cut back on foreign aid, furlow some government workers, and just spend less until things are worked out. Actually, we would make our interest payments to the World. There's no doubt about it. We have enough coming in to the US Treasury coffers from tax payments and revenue sources to make those interest payments, at least for the short term.

Now why all the fear mongering about August 2? Simple, we are nearing 2012 which is an election year. Our government is broken, and no one can make tough choices because they are more worried about re-election and catering to special interests. So nothing will get done until after the 2012 elections.  We will have several short term spending bills and small increases to the debt ceiling until then.  And hopefully we elect some people that can fix our broken system.


1 comment:

  1. Darryl,

    I think you are right on - this is all for show, and the government will do exactly what it has been doing for a long time now, which is kick the can down the road for the next guy to deal with it.

    We are still trying to solve a debt crisis with more borrowing, and my fear is that we are creating another nasty market implosion. The difference is that now we are several trillion dollars further in the hole, and will not have as many options for dealing with it. At some point we have to make some fundamental changes.

    Good post...