Debt Limit

The Secretary of the Treasury sent a letter to Congress the day after Christmas stating that the US government would reach its debt ceiling limit of $16.394 trillion on December 31^st.  If the debt limit is reached, the Treasury Department must, according to the letter, take extraordinary measures to avoid exceeding the limit.  An appendix to the letter outlines the four measures to be taken. 

So, what does that all mean?  If the debt limit is increased or Congress reduces the amount of debt held by the US Government before the measures expire (approximately two months according to the letter), nothing happens.  If neither of these happens and the measures expire, then the federal government would either have to drastically reduce spending or fail to pay interest and/or principle on US Treasury securities.  One choice creates severe economic impacts in the US, the other impacts world financial markets; neither are attractive consequences.

So why doesn’t Congress simply raise the debt ceiling or get rid of it altogether so this issue doesn’t reoccur?  The Second Liberty Bond Act of 1917 established a limit on the amount of debt held by the US Government.  In the past, it’s been fairly routine for Congress to increase the debt limit.  It is a misconception to think the debt ceiling is an arbitrary limit without consequences. 

The letter from the Treasury Secretary states that the US public debt is increasing by $100 billion per month, on average and the Congressional Budget Office predicts that, if the government continues to maintain current spending policies,  within 20 years the debt could approach 200% of the nation’s gross domestic product (GDP) (http://cbo.gov/sites/default/files/cbofiles/attachments/06-05-Long-Term_Budget_Outlook_2.pdf). Currently the debt is approaching 100% of the GDP and at least some in Congress have attempted to reign in the government’s spending before the US has a financial meltdown similar to what occurred in Greece this summer.  Simply, if the government spends as much or more than the country makes, every year brings a greater risk of financial collapse.  This collapse will have real consequences in the lives of every American.

Simply extending the credit limit, or debt ceiling, isn’t the solution.  When an individual applies for a loan, the bank asks what you plan to do with the money and assesses your financial stability.  They determine if lending you money is a financial risk.  If your existing assets and liabilities are too great, you are a poor candidate to meet your obligation to pay them back. The same is true for businesses applying for a loan.  The lender will want to see a business plan, detailing financial plans plus existing assets and liabilities.  Without a viable business plan or if the liabilities are too great, the bank won’t extend the credit.

Some might say the bank is being unfair in denying a loan to any and all, but it’s simply good business practice on their part.  If I’ve already shown a penchant for running up debt, what assures them I’ll meet by obligations and repay my debt to them?

If the US Government were a business, I certainly would not loan it money.  It has no approved budget and no plan in place to reign in long term spending or address long term obligations such as Social Security or Medicare.  Frankly, due to a lack of leadership, it looks like a mismanaged company headed for bankruptcy.  Is that the business model we want for our country?  This is your tax dollars and federal fees they are mismanaging.  When programs that matter to you are cut because the government has decided there aren’t sufficient funds, it is due to the mismanagement of the money you send to the federal government.  What would happen to you if you didn’t pay your bills and kept spending money you don’t have?  You can be sure that at some point, you would be called on your debt with dire consequences, such as losing your home, seizing your possessions, or garnishing your wages.  Well, the time has come to call the government on its debt.  Like the rest of us, they need a financial plan that outlines a viable spending plan for our money and how they will meet their financial obligations.

Contact your Senator (www.senate.gov) or Congressman (www.house.gov) and tell them what you think about the debt ceiling.  Even better, call (202-456-1111) or email (http://www.whitehouse.gov/contact/submit-questions-and-comments) the President and let him know you want solutions and reductions, not more of the status quo.