The Debt Limit

As I write this, the debt limit of the government of the United States must be raised in 2 weeks, by August 2, or the US Treasury will run out of money. Congress cannot reach an agreement, even with the intervention of the President and Vice-President. The Republicans insist that taxes must not be raised, the Democrats insist that spending must be cut.

You know what? I don’t care which side is right. I think they both probably are. What I care about is that if no agreement is reached, the US government will not be able to pay its obligations and it will come to a screeching halt as most money is diverted to interest payments. If we cannot pay the interest, this great country will default on its debts.

Does the populace care? No, as the hubris of our elected Congressional Representatives threatens to destroy the ‘full faith and credit of the United States of America’, we fiddle. We fiddle on Twitter, on Facebook, on our other beloved social media, chattering about this and that, while Rome burns.

Years ago, in a personal finance class in college, I asked the professor if the United States would ever default on its bonds (this was about the time that Argentina defaulted). You’d have thought I asked if the sun would go dark tomorrow. No, I was assured, the United States would never default on its bonds. It would take worse than civil war, it would take the rending of the country into feuding regions, the destruction of the government, before that would happen.

And yet, here we sit, in peace in the country itself, winding down our major war obligations abroad, unattacked in a decade, and we appear to be about to default.

The hubris of our elected politicians is astounding. Elected to represent us, the people, they are about to destroy our economy over a matter of egos. As I said in the beginning, I don’t care how they reach agreement. The important thing is that, as we come out of the worst recession in eighty years, the economy is allowed to keep growing and recovering, not drowning under a huge influx of unemployed government workers and pensioners without Social Security checks.

For numbers, I refer you to something my husband wrote up:

Notes on budget.  Based on 2011 figures from http://www.gpoaccess.gov/usbudget/fy11/pdf/budget.pdf pg 149 See also http://www.treasury.gov/initiatives/Pages/debtlimit.aspx

First of all, the budget for 2011 is already passed, the US just needs to raise the debt ceiling to borrow more money to implement the budget.

To simplify the calculations, I am using the amounts for the whole year to get an idea what the percentage reductions would be required.

The fiscal year 2011 budget has $3728 billion of outlays and $2583 billion of receipts.  Social Security is $730 billion of the outlays and $674 billion of the receipts.  Medicare is $492 billion of the outlays and interest on the debt is $250 billion.

If we keep Social Security, Medicare, and debt payments, those total 730+492+250=$1472 billion.  This leaves 2583-1472=$1111 billion dollars for the rest, which is 3728-1472=$2256 billion.  So the rest of the budget would have to decrease by half (1111/2256=49%)

If we keep the mandatory programs (everything but discretionary programs) and the debt payments, this is 2100+250=$2350 billion, which would leave 2583-2350=$233 billion for everything else (which is 3728-2350=$1378 billion dollars) so the discretionary funding would have to decrease by 83%=(1-233/1378).

Defaulting (failing to pay the debt interest) would cause all kinds of havoc.  It would also trash the “full faith and credit of the United States”.

Comment on Social Security: While social security is a trust fund, the extra money is invested in US government bonds. If the US defaults, these bonds are worthless. For 2011 it is estimated that there will be $674 billion dollars of payroll taxes and $730 billion dollars of payments. If the US defaults, Social Security would not be able to pay the full amount of the checks.

This great country is about to be brought to its knees through the hubris of politicians. It makes me sick.

 

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1 Comment

  1. Ok five states will be bk soon, and Il might be one soon. UGH

    Reply

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