Is it just me or is it a little counterintuitive to be talking about raising the “ceiling” on something--like debt--that is otherwise dragging you down?
Of course in the case of the U.S. debt ceiling, which is dominating the news these days, we’re talking about “lifting” the amount the government is allowed to borrow in order to pay its bills. Congress sets a limit (or ceiling) on how much can be borrowed--currently $14.2 trillion--and that limit was reached on May 16.
Since then, the government has not contributed to government employee’s retirement benefits, as a way to have enough cash flow to meet other debt obligations. CNN explains this well
here.
What’s happening?
Bottom line, there’s not enough money to pay the bills after Aug. 2, the deadline for raising the ceiling. And some in Congress--mainly Republicans--are opposed to simply lifting the limit again, so there will need to be some sort of deal to make it happen. Spending cuts and raising revenues (taxes) are on the table, but the talks have grown increasingly contentious.
What’s at stake
Without more funds, the U.S. government will not be able pay the interest on borrowed money to investors--it would essentially default--and potentially not make Social Security payments. U.S. debt ratings might be downgraded (making them riskier assets to own and potentially harder to sell). The sum of all this would be a “huge financial calamity,” according to Ben Bernanke, the chairman of the Federal Reserve, and many others.
China and other countries that invest heavily in U.S. bonds may be less inclined to buy bonds, making the money situation here tight. This matters because like it or not, it is debt that keeps things moving in the economy -- debt finances new building projects, etc. If you own a home, you likely took on debt to purchase it, ultimately a much smaller example of the kind of financing it takes to run the country.
Bernanke told Congress that if the U.S. were to default on its debt it should stop Social Security payments to pay investors first, and said a default would send mortgage rates and interest rates higher. It would also make it more expensive for the U.S. to borrow money (which it currently borrows very cheaply--at about 3%). Putting this in context: for every dollar the U.S. spends, about 40 cents is borrowed.
Contrary to Bernanke, a group of Republicans in Washington say there would be no major fallout from not raising the debt ceiling and that payments would be prioritized. Others argue it would be a good experience for the United States to not know what it’s like to be able to pay its bills, and better not to “kick the can” -- or problem -- down the road.
The Washington Way
Washington is using this as a political campaign moment. Are you (the politician) for or against increasing tax revenue (closing tax loopholes)? Are you willing to let the government default on its debt obligations and possibly damage global economic stability? How deep are you willing to cut spending to help move the country out of debt? Within the Washington dealmaking, there are some important and challenging questions for the country to answer for itself. But as the clock tic-tocs toward Aug. 2, foreign investors and Wall Street are growing increasingly nervous, and likely so are people who rely on Social Security to live.
Paul Krugman (love him) has a poignant editorial on the topic worth reading.
