Tags: default | payments | debt | dollar

The Debt Ceiling Battle Handbook

By    |   Friday, 11 Oct 2013 07:38 AM

While the president and Congress struggle to end the government shutdown (see this blog post), the federal government has another financial crisis to deal with next week: raising the debt ceiling.

The debt ceiling is in essence how much money the federal government can borrow to fund its approved spending from either having a budget/appropriation or a continuing resolution.

Currently, the debt ceiling is $16.7 trillion, of which the federal government has borrowed a total of $16.7 trillion last May.

If we have exhausted our credit limit four months ago, where are we getting the money to fund government since then? The Treasury Department, which I used to work for when I was director of the Mint, has used "extraordinary measures" to free up cash. This would be the same as you and I juggling cash flow in our checkbook to stretch our dollars until the next paycheck: tactics like delaying payments or postponing purchases.

That bag of tricks will be empty sometime mid-October. When that happens, the federal government will not have enough money to meet all of its obligations on time.

For example, in fiscal 2013, the total revenue (mostly from taxes, some from duties) the government expects to receive is $2.9 trillion. But it is committed to spend $3.8 trillion. To meet all of its obligations, the government needs to borrow nearly $1 trillion.

But because the debt ceiling has been exhausted, if Congress doesn't pass and the president signs a bill to raise the debt ceiling by mid-October, the government will exclusively be funded by the revenue it generates. Because it generates 75 percent of what it spends, the cash crunch means it will not be able to meet 25 percent of its obligations.

Then the president will have two choices.

First, he can choose to miss or delay payments to those holding Treasury debt. This would put the government into default, which would directly threaten the full faith and credit of the U.S. government as a borrower.

Because the U.S. dollar is based on the full faith and credit of the United States, the dollar would be hit badly. And because the dollar is the world's monetary standard, a default will have huge negative ramifications on the world economy. A default would also probably cause our country's credit rating to be downgraded, which would in turn increase future borrowing costs.

And if that were not enough, think what the above would do to our slow and fragile economic recovery.

Second, he can choose to delay payments to others who are owed government funding, like Social Security beneficiaries, veterans, Medicare and Medicaid providers and contractors. This would put the government into a technical default. A technical default would hurt some people and have a negative impact on our economy, but it would not have the potential for devastation that a default would have.

Whose needs should be the top priority: our nation and the world, or a subset of our citizens?

Woody Allen offers some insight for us. "More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly."

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Ed-Moy
While the president and Congress struggle to end the government shutdown (see this blog post), the federal government has another financial crisis to deal with next week: raising the debt ceiling.
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2013-38-11
Friday, 11 Oct 2013 07:38 AM
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