The 2013 Debt-Ceiling
- By Simple Politiks
- 10 January, 2013
- 33 Comments
NEWS + OPINION
The red alarm deadline to raise the debt ceiling could be as soon as Feb. 15 — but no later than March 1, according to the latest estimate from the Bipartisan Policy Center.
Less than two months after coming to terms with the fiscal cliff legislation, Congress is headed for more divisive and heavily contested issues. Unfortunately, because of their utter incompetence, Congress was unable to reach a complete compromise for the fiscal cliff. Therefore, over $100 billion worth of spending cuts have been rescheduled two months down the road. Almost coinciding with those spending cuts is another bill of fiscal cliff proportions: the debt-ceiling shutdown.
So now two deadlines for separate bills stand before Congress within a very short time frame; both have the capacity to plague America’s economy (which means the world economy, by default) with avoidable yet detrimental circumstances. Despite the very real threat each bill poses if left ignored, the fast-approaching debt-ceiling takes precedence. The damage that could come as a result of a failed debt-ceiling compromise is much more far-reaching in its severity than the unfinished spending cuts. Allow me to explain why.
Firstly I think it’s important to distinguish the differences between a government shutdown and a debt-ceiling shutdown, as I do not believe they are well-known. Below is a quote from Shai Akabas, a researcher at the Bipartisan Policy Center:
In a government shutdown, the government is shutting down future obligations. With the debt ceiling, they’ve already obligated the money. They owe these people the payments now, and they can’t make them.
But how was the risk of debt-ceiling shutdown caused?
Here’s the short story…
When Congress increased the last debt ceiling they agreed on $16.394 trillion. As of December 31, 2012, the federal government had reached the limit (the specifics about how they reached that limit goes back to Washington’s spending problem and many other issues I won’t delve into right now). Since then the government has been running on “extraordinary measures” to ensure its timely and full payments. Desperate measures can only last so long, though. That’s where the estimated deadline from BPC (the above graph) comes from. If Congress doesn’t come to some agreement about a new debt ceiling by that time, the debt-ceiling shutdown commences.
The federal government is committed to more than 100 million individual payments between February 15 and March 15. Without borrowed money the federal government wouldn’t be capable of honoring 40% of these payments, which means it would default on 40% of its obligations. Can you imagine what kind of impact defaulting on millions of obligations would have on the economy? It would tear any investor’s confidence asunder. Other nations and even domestic investors would be hesitant about striking any sort of deals with the federal government because of extremely prevalent uncertainty.
Speculative consequences aside, the definite consequences could be an even greater threat to American well-being. If 40% of the loans are going to be unfulfilled, then the federal government may have to choose between the American people and the bond investors – and it is very possible that the bond investors could take priority. Complicating things even more, these millions of payments are carried out by a very complex system of computers. These machines are probably not designed to deal with defaulting, and they are almost certainly not programmed to prioritize payments in case of a debt-ceiling shutdown. This means that the U.S. government may not even be able to reprogram the devices for this potential emergency. The result is a perplexing and possibly somewhat random allocation of funds to 60% of the promised payments. Will Social Security get funding? What about Medicare? Any of the bond investors? Or maybe the FBI, CIA, transportation and education will get shafted? Nobody outside of the higher-ups in government know the answer, but all possibilities are troubling and inadequate.
Everybody agrees that defaulting is disastrous, but one party sees the bill as something other than an emergency; Republicans also see it as a bargaining chip. Republicans have made their terms very clear: without proportional cuts in spending they will not permit a heightened debt-ceiling. The GOP has incurred significant blowback because of this rigid form of compromise. Still, they refuse to waver.
The immovable Republicans have caused Democrats to scramble for other means of raising the debt ceiling. So far, two odd ideas have risen to the surface. The first?
- Letting President Obama interpret (very loosely, might I add) the 14th amendment in such a way that allows him to bypass Congress entirely
Below is the controversial loophole in the 14th amendment which has been exploited by various attorneys:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
The White House denounced this tactic as unconstitutional, but it could still be on the table as a last-ditch effort. It does not come without immense risk, though; President Obama may be subjected to impeachment if he were to embrace this 14th amendment loophole.
What about the second loophole?
- Issuing a $1 trillion platinum coin to pay back some debt
Below is the reasoning behind this idea from a news article:
Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.
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That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a $1 trillion platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit.
Like abusing the 14th amendment, this idea is also controversial. Furthermore, it is outright impractical in the business world. What kind of purchase would require one unit of $1 trillion? There has been talk of much smaller increments which, at the very least, would be more realistic to carry out payments.
One should also consider how other countries could perceive us minting a $1 trillion coin to bypass a debt-ceiling shutdown. Their confidence would most likely fall dramatically so the private sector’s success, federal government’s loans and our credibility as a whole would wane. Is it better than a default? Yes, but it is still a failure.
** It is important to note that weakened confidence could also be an outcome if President Obama overrides Congress through the shady interpretation of the 14th amendment.
Lastly, minting such a coin only delays the inevitable. It is much better to solve our problems now instead of a year or two down the road. Conditions and relationships only worsen as brinkmanship lingers.
The preposterous extent that Congress is resorting to solve the problem without compromise is staggering. This is the time for Democrats and Republicans to sit down together and seriously reform the plethora of unsustainable policies in America. Nothing extremely drastic must be altered right now, but a few steps in the right direction should be the worst case scenario. If not, when can we expect to see Congress in such a precarious yet motivational predicament again?
This is their last chance to seriously discuss options to cut spending and begin a common sense approach to fixing our debt. Taxes have been put in place, addressing the spending remains. Without a step in the right direction this year, the debt-ceiling is destined to become a frequent side-effect of budgetary foolishness.
Solve the issue now, Congress. The price we will pay is too great to place on the nation if an agreement is not successful. Do what we elected you to to do as public servants: your job. And don’t stop there – do it well.
Copyright © 2013
In my household I earn more than I spend over the long term. If I don’t do that then I go bankrupt. Surely, exchange rates aside, the same argument applies to nations. I’ve seen it argued, on that basis, that Western economies are a ‘house of cards’. So all these very short term deals and workarounds just delay and worsen the problems for future generations. So the current politicians are probably just as inept as the previous 3 generations worth.
I think the GOP has lost total controller over some of there politicians, I think they will do anything to make the Obama administration look bad. I find this sour grapes attitude toward the election a disgrace to our nation and I think mr. Bohner is the worst leader in YEARS! I am a student of Paul Krugman and he says mint the coin. The U.S. can’t take another railings hit and the head if the I.M.F says that this playing will grately harm the security of the euro. I agree with her this whole generation of business men and politicians have been an utter disgrace and should ALL be removed! Did u see AIG wants to sue he government over tarp? They claim they didn’t get enough pay out when we bailed them out! I would love to read ur comments on that!
I think it is dangerous. Both sides are on a collision course and nothing good can come of this unless we all work together.
Excellent writing. Tried to subscribe and can’t. Please enter me in to receive your blogs. rkutchjm@hotmail.com.
Happy to experience your quality journalistic talents.
Thank you.
I just did, let me know if you didn’t get a confirmation email. Thanks for indicating your interest, greatly appreciate it.
There is absolutely no need for President Obama to entertain GOP’s hostage taking tactics on the debt ceiling issue. The President should either mint a coin or issue MOCs (as Krugman calls it) or IOUs (as Chait refers to it) and then it would put that much more pressure on GOP to raise the debt ceiling. But, the debt limit is a fictitious, trumped up, unnecessary issue. We need to talk about increasing jobs and getting people back to work before we discuss austerity. http://thepoliticalequation.com/2013/01/10/a-response-to-debt-ceiling-nonsense-mintthecoin-or-iou/
But what kind of message is sent to the investors on and offshore if President Obama bypasses Congress? The President’s abdication of his responsibility to be the leader in compromise will undoubtedly result in a weakened level of confidence (and therefore a weaker economy, to a certain extent). Perhaps this is the course of action he could take if it were the night before and there was no compromise in sight… But any sooner sends the message that the President is unwilling to compromise. Not only is that bad for business expectation and certainty in the market, it’s also a terrible form of governance/leadership which will only lead to fiercer brinkmanship from Republicans on future policies.
As repugnant as Democratic-Republican relations have been as of late, do you think Republicans actually have an argument in this standoff? In terms of spending reform – which is absolutely vital to reduce the debt because mandatory spending (entitlements) engulfs the largest amount of revenue – Democrats have been very resistant. Although incredibly risky and rash, using the debt-ceiling as leverage could be somewhat justified for the Republican party. Don’t you think so?
Great article. I am so sick of all this bullshit. The question is what percentage of Americans truly knows what is going on? What percentage of Americans really care? That is part of the problem. If you get a chance, please go through what I wrote on the Dec 26th, The Buck Stops Where? Here I am supposed to be writing about nutrition and health and I get so pissed off I write about the Feds. We are much smarter than they think. Just don’t know what “we” can do!
Thank you.
Rob
The WH announced today that they’re not going to use the 14th Amendment.
Nicely written
Thank you.
I, first, admit that I am not very good at following politics. I find most of it very disturbing and disruptive to the utopian world I have created in my head. joking… Seriously, though,
Our biggest problems with our government are 1) the people are uneducated as to how it really works, 2) the people have forgotten that they have the right to say no, 3) the people think that ‘he, who has the most gold or controls the gold, wins” 4) some politicians in office do not work for our benefit, but their own, 5) most politicians are in office FAR too long 6) it’s been way too long since our last revolution.
Even though President Obama is apparently not going to exploit the 14th Amendment loophole, he could hardly be blamed if he did. As disgusted as most of us are with Congress, imagine his level of exasperation – he has to deal with their little hissy fits and posing every day. It might have sent a less than attractive message globally, but it just might have made the children in Congress sit up, take notice and stop shooting spitwads at each other. Anyhoo….thanks for stopping by my blog, and I’ll be stopping by yours from now on – it’s very well done.
That trillion-dollar coin idea is just bizarre. IMHO
Good writing. And I’m glad you found my latest blog post interesting. Hope you find some of the others of interest too, particularly the ones about politics and economics.
Still, I suspect my greatest effect will come from my attempt to control the effects of global warming/science and possibly my comments that deal with education.
I do a lot of commenting via Facebook; I’m the administrator of a group there called The Intelligent Round Table. If you’re on Facebook, stop in and check it out; I’ll approve your membership if you want to give it a try.
Again, good writing; I’ll be checking the rest of your entries. I’ve now subscribed to your blog.
Thank you very much for your kind words. I’ll be sure to read your other posts too.
I think I’ll check it out if that’s okay with you. My name is Colin, you should get a request from me shortly. Thanks again.
Take care.
Thanks for stopping by my blog. I’m thoroughly enjoying yours!
That’s great to hear! And no problem, my pleasure.
The idea of stamping a 1oz coin of platinum to the value of 1trillion$, would that not affect the bullion value of platinum? If one ounce of almost pure .9995 platinum has a monetary value of one trillion and I happen to have 10oz. of the stuff would that not mean I have a monetary asset of 10trillion dollars would it not? If it works for gold, why wouldn’t it work for platinum?
I believe it is because the coin is still considered faux money because its intrinsic value is so much lower than the value the government sets. Much like acquiring more paper doesn’t you wealthier, acquiring platinum will not either. All that matters with faux currency is if the material (paper, platinum, etc…) is officially minted.
I could be wrong, but that is my current understanding of it.
I like yourself am not sure what the implication would be but too, it raises a quandary: why even bother with a `physical’ representation of a monetary value: just `key’ it in to the computer – x-trillion dollars to net out a zero balance? Then turn out the lights and hope tomorrow happens lol!
You can only bury your head in the sand for so long, one day the reality sinks in. Disaster awaits, just around the corner. What a shame the U.S. seems to adopt the “head on the sand” approach to all financial difficulties, and the problem just keeps getting bigger.
Thanks for stopping by my blog. I think you blog is very well written and for me, I like you easy to understand way of articulating the issues that are going on. I am not a far right or far left person but rather someone who wants to understand the issue and determine my position based on the specific issues, not based on a party stance. I will continue to be watching you blog for more interesting posts.
Madness, playing with this limit on debt already incurred. People keep mentioning the private sector, but I suggest those folks take a look at the bonds corporations issue and routinely roll over, debt they can essentially push forward indefinitely.
If we intend a better society, we have obligations to care for all, and not just a few.
I am an avid member to The Real News Network (http://trnn.com) and they present an insightful and informative reporting on this topic as well, that which is implicated by measures taken by the Obama administration. The following is a link to a series of interviews and presentations for you edification on this compelling and important subject: http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=795
Interesteing phenomenom….Somewhere between WWI and WWII someone got the idea that if the country doesn’t have enough money. Just keep printing money. Wonder what happened then?
Seems like a straightforward equation – either spend less than what you earn or earm more than what you spend. Whether you are an individual, a company or a country. Most politicians don’t seem to get it. And we, the people, seem to buy pictures of a rosy distant future when all economic problems will magically vanish. Seems improbable!
The Pres. has already set the stage for the next budget which is the real fight to come
I question the Constitutionality of the debt ceiling. I think that the President should not negotiate about the whether or not we pay our national debt; it is not a topic that should be up for debate. The Fourteenth Amendment clearly states “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”.
I assert that America needs to maintain its good standing as a debtor, nuff said!
Right on the mark!
The Republicans keep up their antics, and they will cement the Clinton Obama type Democrats as the archetypes of control for years to come. One correction, however, Jefferson and Jackson got rid of private banks that controlled our money supply. The Fed Reserve System is a private bank that prints our money, and Jefferson and Jackson would be aghast at its existence as it filters wealth to select private interestes, in this case owners of the Federal Reserve or commercial banks. The US could live without the Fed; and the Treasury could handle money matters including currency like it did from the 1830s to 1913. Whether it did a good job is an open debate. I actually thing the Treasury should try and mint some billion dollar coins–they create seignorage by doing so, another pocketed gain by the government, and likely inflationary, which it seems the Federal Reserve Banks would sorely want. We live in very interesting times in terms of banking. We just went throught the worst crisis in 70 years and the practices that brought us to the brink are still operating. There has been no reform. Both parties are in the pockets of the Wall Street, and that is not good for America, but I believe this will be corrected in the next 10-20 years by a politician that combines the smarts and wits of a Teddy Roosevelt. We are still waiting for the next Teddy. Obama is not the one.
What do think about this “Game Theory” explanation of the gridlock? http://www.theatlantic.com/politics/archive/2013/01/how-game-theory-explains-washingtons-horrible-gridlock/267142/#.UPV7ewbu6NY.mailto
Good post. The debt limit needs to be hiked as we must pay our bills. Then, we need to get down to business on the deficit looking at all levers, including revenue increase, defense spending cuts, and social program cuts. The poor stewardship that has been going on for the past twelve years since we were last balanced is appalling. This is the essence of Simpson Bowles. To take any lever off the table is a disservice to reasonable discussion. Thanks, BTG