Debt Ceiling in US under Obama Administration
A “debt ceiling” is the maximum amount of debt that a government can take on. When a country borrows, it incurs debt. In an effort to prevent governments from borrowing in a reckless manner, a debt ceiling was imposed in 1917. The debt ceiling began with the Second Liberty Bond Act of 1917, and helped finance the United States’ entry into World War I. By allowing the U.S. Treasury to issue long-term Liberty Bonds and short-term debt instruments, the federal government held down its interest costs.
The government currently spends more money than it brings in through revenue; this translates into a deficit and a growing debt. There is also a limit on how high the debt can run. The debt ceiling first imposed in 1917 was set at $11.5 billion. Today, the debt ceiling is set at $16.4 trillion. Once the government broaches this limit, it becomes more difficult for it to borrow money. At the same time, Congress can vote to increase the debt ceiling and has numerous times. If the debt ceiling is not raised, interest payments on bonds would not be met and the country would default on its loans.
Debt increases when the government sells debt to the public to finance budget deficits. This increases the amount of debt held by the public. Debt also increases when the government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases the amount of debt held by government accounts. Combined, the debt held by the public and the debt held by government accounts is the total federal debt.
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
America is fast approaching the $16.4-trillion limit in national debt that is legally allowed under the current debt ceiling. With the current debt at $16.24 trillion, time is running out, which is why we need to either resolve the fiscal cliff or, as the President wants, hike up the national debt ceiling in order to allow the government more flexibility in its spending. Failure to raise the national debt limit would mean that the government would need to access emergency funds to avoid a default and initiate the fiscal cliff cuts and tax increases in some form.
So far, the talks between House Speaker John Boehner and President Obama have resolved little. Just last week, Boehner offered up a new 10-year, $2.2-trillion strategy that entailed adjustments to Medicare and Social Security benefits but also avoided a return to higher taxes for the nation’s top income earners. In response, the President is willing to look at reviewing the highest tax rate for the rich, but at the same time, he wants to cut loopholes.
With just over three weeks left in the year, something will need to be done. In the event that a resolution is not achieved, the government will have to access emergency funds until a deal is agreed upon. This is the dilemma that we are at now; but something has to be done, or America could be leaving a much worse financial mess for the generations ahead, including a possible recession and massive national debt.
Moody’s Investors Service warned it may cut the U.S. triple-A debt rating for a second time in 2013, should the government not … Read More
With the elections this year, the White House is hoping that the budget deficits each month will not reach a point where government debt will breach the debt ceiling until after the elections.
From the reported monthly budget deficit numbers thus far, this is looking less and less likely. Not to worry though, as the election campaigns kick into high gear in September, Secretary of the Treasury Timothy Geithner will reach into this bag of tricks to satisfy the debt ceiling and the budget deficit.
There is no way the debt ceiling issue will be allowed to complicate the election campaign. Instead, Geithner will borrow and increase the budget deficit from pensions or another branch of government to prevent the debt ceiling from being breached.
This way, the issue of the debt ceiling and the budget deficit can be addressed after the election results.
Besides the fact that we should all be very troubled that the debt ceiling is being breached so quickly, there is another issue that no one is discussing: the economic and societal implications of the government using accounting gimmicks to adjust the budget deficit.
Is it just me, or does anyone believe the White House needs to lead this country by example anymore? It should represent the highest standards and exemplify the principles on which this nation was founded.
Instead, budget deficits continue to mount and government debt continues to reach levels the world has never seen—don’t worry, the government has it under control, which is an outright lie. As if this weren’t enough, now the White House is resorting to accounting gimmicks to circumvent the … Read More