Debt Ceiling Raises Ugly Head
Hold on. Before you get to feeling all warm and fuzzy inside thinking that the fiscal cliff is the only financial problem facing the U.S. federal government… think again!
We are on the doorstep of yet another cat fight over raising the debt ceiling limit!
As of the 23rd of November the national debt hit $16.31 trillion. That puts it about $80 billion shy of the current debt ceiling limit of $16.39 trillion. That means, of course, the Congress will soon have to raise it again.
The last time that cat fight took place, a year and a half ago, the country got more politically and ideologically polarized. Everyone was mad and the U.S. federal government’s credit rating got cut for the first time in history.
At the current spending rate, the official debt ceiling limit will be reached in just 22 days. The fiscal cliff is reached in 35 days.
We face a two-pronged threat – the debt ceiling limit and the fiscal cliff arriving at the same time.
The Good News
If it can be called ‘good’, the U.S. Treasury has a series of “extraordinary measures” it can take to stave off raising the debt ceiling for a while. In 2011 it extended the time an additional 77 days.
The federal government took all 77 days before coming to an unhappy agreement.
You can bet the farm that emergency measures will be fired up once again. You won’t read about it, though. It’ll be buried under all the fiscal cliff headlines.
With 77 extra days, the federal government will not risk an actual default again until mid-March 2013. You can expect that to be the next crisis to rise up come February.
However, the resolution of the fiscal cliff will have a big impact. If taxes are raised and real spending cuts take place then debt growth will slow and raising the debt ceiling will not be necessary as quickly.
In order to make a deal over raising the debt ceiling in 2011, Congress agreed to spending cuts to satisfy growing credit market uneasiness over the federal government’s frightening rate of deficit spending.
A problem, though, resulted when Congress was indecisive about what to cut, so it kicked that can down the road… twice.
Guess what? We are down the road again!! The issue still isn’t solved. It has now become folded into the fiscal cliff.
A sign of fiscally irresponsible, dysfunctional government is when a debt crisis evolves into a continuous spectrum of crisis management.
That is what the United States is in now. One debt crisis isn’t resolved before the next crisis arrives. Each new crisis seems more complex and more politically difficult to resolve than the last. We still haven’t recovered from the near total collapse of the financial system in 2008.
Some suggest that we should do away with the debt ceiling limit all together and that would solve the debt problem. It won’t.
The reason for having a debt ceiling limit is as relevant today as when it was created by the Second Liberty Bond Act of 1917 used to fund World War I.
Governments issue bonds for only one reason… to reduce its cost of borrowing. Setting a debt limit ceiling protects the value of government issued bonds which, in turn, reduces government interest costs.
The debt ceiling and entitlement spending are long-term debt that should be dealt with using long-term solutions.
The fiscal cliff is about economic recovery and short-term debt and should be addressed with a short-term solution.
There isn’t a silver bullet. These fiscal issues cannot be solved with a single solution.
By trying to concoct a combined solution now, Congress will only make a big mess bigger.