Everything You Need to Know About the Debt Ceiling

Congress made a deal to avoid the fiscal cliff, but you don't actually think we're done with 11th-hour partisan battles that bring the country's finances to brink of ruin, do you?

Of course we're not. Sometime in the next six weeks, the Treasury won't have enough money pay the government's bills. Prevented from borrowing more because of the self-imposed debt ceiling, we'll face two options: Either Congress must agree to raise the debt ceiling, or something awful will happen.

Confused? Here's what you need to know.

What is the debt ceiling?
Before 1917, Congress literally had to approve each new debt issuance, deciding on the bond's maturity, its interest rate, and what the money was specifically to be used for.  

This became too burdensome on the eve of World War I, when the government needed to quickly spend a lot of money without stumbling over administrative rules. So, in 1917 Congress passed the Second Liberty Bond Act, which provided authority to issue new debt with relaxed restrictions on the maturity and redemption of bonds being issued.

Those restrictions were eased throughout the 1920s and 1930s until being removed in 1939, replaced by an aggregate debt limit. After that, Congress basically told the Treasury: "You can borrow this much money. Go figure out the best way to do it." When the limit was hit, Congress raised it. Thus began the modern debt ceiling. 

What's happened since then?
Since 1939, Congress has raised the debt ceiling 83 times, or about every nine months. It's usually raised without any fanfare or protest. Raising it became an issue only in recent years, when parties realized it could be used as a bargaining chip.

Logically, there's no reason for there to be any protest. The most important thing to understand about the debt ceiling is that it doesn't control how much money Congress spends. It controls the ability to pay for what Congress has already agreed to spend.

What's happening now?
The current debt limit, $16.39 trillion, was hit last week. The Treasury can still pay the government's bills on time by juggling around payments -- what it calls "extraordinary measures" -- but only until the middle of February. After that, the government's previously agreed-upon spending will exceed tax revenue, and without the ability to borrow more, the Treasury won't have enough cash to pay its bills.

What happens then?
We've never not raised the debt ceiling, so there's no precedent for what might happen if Congress doesn't reach an agreement.

The Bipartisan Policy Center estimates the Treasury will receive $277 billion in tax revenue between Feb. 15 and March 15 and owe $451 billion in spending commitments, much of which are tax refunds. So just in the first month, there's $174 billion in bills that the Treasury would be unable to pay.

Legal scholars and government officials, including Treasury Secretary Tim Geithner, dispute the idea that the Treasury can "prioritize payments" to pay the most important bills first and may instead be forced to pay obligations on a first-come, first-serve basis.

Assuming the Treasury could prioritize payments, the BPC created a scenario of what the government could and could not pay for in the first month:

Mix these up any way you'd like. Someone or some program that most people would deem a "priority" isn't getting paid.

And that's important in the eyes of global financial markets. Even if bond interest is prioritized and paid on time, it's likely that investors would see any group not getting paid as a government default. Lending is about trust. If you see a defense contractor not getting paid for services it's already delivered, would you trust the U.S. government's creditworthiness? You probably wouldn't. And neither would the bond market.

If the bond market loses trust, it may stop agreeing to roll over old Treasuries into new bonds. Then, the Treasury might not have enough money to repay bond principal, let alone interest. Tim Geithner mentioned this threat last year:

In August of [2011], for example, more than $500 billion in U.S. Treasury debt will mature. Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. ... [I]f investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities.

There's no telling what would happen to markets if the debt ceiling isn't raised, but the odds are high that it would be some form of panic, almost certainly sending the economy back into a recession (which, ironically, would worsen the deficit). Ben Bernanke put it politely: Not raising the debt ceiling "would no doubt have a very adverse effect very quickly on the recovery. I'm quite certain of that."

If Congress doesn't raise the debt ceiling, is there a reasonable Plan B?
Two options have been proposed that would let the Treasury borrow more even if Congress doesn't raise the debt ceiling.

One is to invoke a clause in the 14th Amendment and challenge the constitutionality of the debt ceiling. But as President Obama said last year, "My lawyers ... are not persuaded that [the 14th Amendment] is a winning argument." Press Secretary Jay Carney put it more bluntly: "This administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling -- period."

Another is the so-called "platinum coin" option, where the Treasury exploits a law that lets it mint special-edition platinum coins in any denomination. In theory, it could mint a trillion-dollar platinum coin and cash it in at the Federal Reserve, thus creating enough money to pay its bills without borrowing more. As long as the Fed sold enough bonds to soak up the new cash created, it wouldn't lead to extra inflation.

Is the platinum coin option ridiculous? Of course. But so is voluntarily defaulting on our debt.

If we don't raise the debt ceiling, is the U.S. bankrupt?
No. The debt ceiling is a self-imposed limit, and this is a self-imposed crisis. Global markets are more than willing to keep lending the U.S. government money at very low interest rates. Congress can end this nonsense as soon as it wants to. 

Ronald Reagan gets the last word: 

The country now possesses the strongest credit in the world. The full consequence of a default -- or even the serious prospect of default -- by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The nation can ill afford to allow such a result. The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: The Senate must pass the legislation before the Congress adjourns.


Read/Post Comments (67) | Recommend This Article (75)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2013, at 11:32 AM, DS31 wrote:

    <Raising it became an issue only in recent years, when parties realized it could be used as a bargaining chip.>

    Morgan, I think this statement is only half-true and results in being a bit misleading. While true that it has become a bargaining chip, it is not true that this "realization" is the sole reason for why raising the debt limit became an issue. The primary reason why raising the debt ceiling has become an issue is because the debt to GDP ratio combined with the total national debt has become too alarming to many folks in Congress.

    I know you didn't explicitly say that it was the "only" reason but your comments can be very easily understood to imply that. The remainder of your article makes it clear that you don't view this tactic of the conservatives favorably. That is quite fine. But my hope is that, concurrently, you don't view the continual deficit spending favorably either. And if that is the case, then we will have to pick our poison.

    -Dan

  • Report this Comment On January 09, 2013, at 11:35 AM, fool3090 wrote:

    That we are even entertaining the notion of the United States government voluntarily defaulting is beyond my comprehension. It is also beyond the pale.

    I don't want to ignite partisan bickering, and government spending is out of control, but is this really what our leaders want? I'm afraid that the default "that'll show 'em" approach will only reaffirm the world that America is not be trust.

    That being said, I have my 2012 Roth contribution set aside and ready to deploy when the ensuing mini-panic erupts and markets swoon. If, on the off chance Congress decides to put on the big-boy pants and avoid a crisis, it will be still be a good time to invest because calm heads prevailed and uncertainty will be lower. Either way, Fools win.

  • Report this Comment On January 09, 2013, at 4:35 PM, mdk0611 wrote:

    Congress, by passing the fiscal cliff legilation as late as it did, actually made a choice with respect to what payments go out. IRS announced that they can't begin processing 1040's until Jan. 30, with an even longer delay for some complex returns. They wii be weeks behind in issuing tax refunds. Thus, that choice has already been made.

    BTW - That section of the Reagan statement about risks, costs, disruptions and incalcuable damage can also be applied to a refusal to address our unfunded entitlement problem and never ending overspending.

  • Report this Comment On January 09, 2013, at 5:19 PM, smartmuffin wrote:

    "Logically, there's no reason for there to be any protest. The most important thing to understand about the debt ceiling is that it doesn't control how much money Congress spends. It controls the ability to pay for what Congress has already agreed to spend."

    Um.... no. Pretty sure taking away someone's ability to pay for things will also affect their propensity for spending.

    Whether or not they have "already agreed" to spend X amount of money is irrelevant. Don't let them borrow any more and they can't spend more. Period. By the way, the Supreme Court has already ruled that Social Security Benefits (along with various other entitlement programs) are NOT in fact an obligation, and can be altered, reduced, or suspended by the government at any time.

  • Report this Comment On January 09, 2013, at 5:25 PM, eddietheinvestor wrote:

    Typical Morgan Housel argument: Republicans are obstructionists who see the desire to stop excessive debt as "a bargaining chip" to stop Obama, Republicans care more about hurting Obama than with anything else. Nowhere in the article does it mention that Obama declared much debt and raising the debt ceiling as "unpatriotic" and "a failure of leadership" of the president (Bush). When Obama took office, the debt was $10.6 trillion. It's now $16.3 trillion. Yes, it is true that the debt ceiling has been raised many times, but never when it was this high or unsustainable. The political bias of the Motley Fool is unmistakable.

  • Report this Comment On January 09, 2013, at 5:32 PM, TMFMorgan wrote:

    ^Sorry, where did I say republicans? I said parties. plural. Democrats have threatened not to raise it in the past too. Senator Obama voted to not raise it at least once.

  • Report this Comment On January 09, 2013, at 5:52 PM, eddietheinvestor wrote:

    Hi, Morgan, Thank you for your response. I do think it is certainly implied. There is only one party that currently is talking about refusing to raise the debt ceiling and that is currently being called obstructionists who are politicizing the debt. How many Democrats are refusing to raise the debt ceiling?

  • Report this Comment On January 10, 2013, at 7:44 AM, dbtheonly wrote:

    Morgan,

    Just a quibble. Income Tax refunds are not part of the debt. They represent monies over-withheld from Taxpayers during the year. They were never Government Dollars.

    eddietheinvestyor is right. The "This High This Unsustainable" argument has been run since at least 1789 in the US. It's only since the Black Guy became President that the issue has become prominent.

  • Report this Comment On January 10, 2013, at 7:53 AM, TMFMorgan wrote:

    <<Just a quibble. Income Tax refunds are not part of the debt. They represent monies over-withheld from Taxpayers during the year. They were never Government Dollars.>>

    It doesn't say anywhere that they're part of the debt. They're a bill Treasury has to pay, and it needs cash to pay them. Since it will be out of cash by Feb. 15, it won't be able to pay them without raising the debt ceiling.

  • Report this Comment On January 10, 2013, at 7:57 AM, TMFMorgan wrote:

    << I do think it is certainly implied. >>

    There is no way a plural word can be implied as referring to a single subject. Full stop.

    <<How many Democrats are refusing to raise the debt ceiling?>>

    Most congressmen haven't signaled their stance for an upcoming vote, but 82 democrats voted to not raise the ceiling last year:

    http://www.marketwatch.com/story/congress-plans-symbolic-vot...

  • Report this Comment On January 10, 2013, at 10:20 AM, StanfordMBAFool wrote:

    @smartmuffin

    <i>Whether or not they have "already agreed" to spend X amount of money is irrelevant. Don't let them borrow any more and they can't spend more</i>

    Having already agreed to spend something is NOT irrelevant at all. It's entirely the point. These are obligations entered into by Congress. Without some achievable, realistic plan to reduce those obligations (which they haven't produced), it's entirely irresponsible to just stop payment.

    No doubt, our debt to GDP ratio is alarming. But threatening a default when you are responsible for the bills that control spending and taxation is putting your head in the sand, not dealing with the problem.

  • Report this Comment On January 10, 2013, at 11:03 AM, smartmuffin wrote:

    " it's entirely irresponsible to just stop payment"

    And it is ALSO entirely irresponsible to commit to spending a bunch of money that you don't have, and that you don't have any plan to obtain.

    Yet, you and Morgan don't seem to be taking any particular issue with that. Only with the "not paying" part.

    The time to create an "achieveable, realistic plan to reduce those obligations" is BEFORE you enter into them, not decades later. Unless you think "constantly borrow more money with absolutely no limit" is achievable and/or realistic.

  • Report this Comment On January 10, 2013, at 2:36 PM, bamboomaster wrote:

    Controlling the spending budget and paying bills are two separate things. We all want to control our budget and debt ratio; however, at the same time we have to pay our bills in order to keep the borrowing cost low WHILE we are fixing the issue.

  • Report this Comment On January 10, 2013, at 2:48 PM, DoctorLewis4 wrote:

    Morgan has presented an entirely reasonable look at the situation. Of course he will be skewered by the right - a party - let's be honest - that can't even make a deal with itself. If you remove the vitriol we can all calm down. Yes we need to raise the limit. Yes we need to cut spending. Let's all calm down and do both.

  • Report this Comment On January 10, 2013, at 3:31 PM, DJDynamicNC wrote:

    @Smartmuffin: "And it is ALSO entirely irresponsible to commit to spending a bunch of money that you don't have, and that you don't have any plan to obtain."

    I agree entirely with this.

    However, when Congress appropriates spending for the purpose of maintaining our civilization, it does have at least one clear plan for obtaining funding - borrowing money to invest in the economy, loaned at historically low rates.

    Any business would be wise to pursue such an option. I'm unclear what makes it so drastically different for the United States, a nation which sees economic transactions every year that total a value in excess of the currently held national debt and that possesses clear and simple means to increase revenue and obtain loans at exceptionally low rates.

  • Report this Comment On January 10, 2013, at 3:55 PM, smartmuffin wrote:

    "Yes we need to raise the limit. Yes we need to cut spending. Let's all calm down and do both."

    We've raised the limit like some seventy times in a row, right.

    We haven't cut spending (as in, the government spends less in a year than it did the year before) since the 1950s.

    You'll have to forgive me if I don't think that anyone in Washington is serious about cutting spending so long as the debt limit increases.

    "Any business would be wise to pursue such an option."

    If a business was only authorized by its shareholders to borrow up to an existing amount, it would be quite foolish to commit to spending a great deal more than this amount, especially if it knew that a large portion of its shareholder base was quite against the concept of borrowing any more money and was not likely to improve additional borrowing.

    You are correct that in that they did in fact have a plan, to borrow the money. But if they committed to borrow MORE than they were authorized, that is a very poor plan, and perhaps, rather than enabling them to continue down this path, we should stop them in their tracks and hold them accountable, for once.

  • Report this Comment On January 10, 2013, at 6:27 PM, TMFMorgan wrote:

    <<We haven't cut spending (as in, the government spends less in a year than it did the year before) since the 1950s.>>

    Federal spending fell year over year in fiscal year 2011, actually.

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&am...

  • Report this Comment On January 10, 2013, at 6:32 PM, TMFMorgan wrote:

    For another view of federal spending that allegedly hasn't declined year over year since the 1950s:

    2009: $3.517 trillion

    2010: $3.456 trillion

  • Report this Comment On January 10, 2013, at 7:02 PM, Kauaicat wrote:

    Re: decreased spending from 2009 to 2010 - this merely points out the problem with baseline budgeting. The 2009 stimulus bill, even though spent (mostly) over 2009 and 2010, has formed a new, higher baseline than the 2008 baseline. What would be the effect of returning to pre-financial crisis budgets, like the 2007 budget?

    The new tax increase on $400K incomes amounts to only $60B per year - half of which will be consumed by the interest on the projected 2013 deficit - if they actually collect that much as high income earners find ways to save on taxes. Furthermore, just wait until interest rates eventually increase to historical averages.

  • Report this Comment On January 10, 2013, at 9:31 PM, DJDynamicNC wrote:

    ^^^ It's interesting that you point out that interest rates are well below historical averages without following through to the logical conclusion that now is the time to issue bonds and lock in those rates and get the money into the economy (pure basic Keynes).

    There is simply no good reason not to do so when interest rates are low enough that inflation makes it essentially profitable to borrow money.

  • Report this Comment On January 10, 2013, at 10:07 PM, harmonyjoe wrote:

    from my perspective it makes absolutely no sense at all to destroy the economy of this country to force the government to spend less money. If someone can point out to me how that helps more than hurts every man, woman and child in this country I will be happy to sit up and take notice.

    In the meantime, in lieu of any meaningful education to the contrary, it appears to me that if the Republicans wish to wage that kind of war on the economy of this country they should be held fully accountable for the consequences and depending on those consequences charged with treasonable acts.

  • Report this Comment On January 11, 2013, at 6:31 AM, SPARTANBURG wrote:

    An empire always crumbles from within. Here we are playing with the "ceiling"or is it "silly" subject just because we believe we as Americans have the luxury to argue who came first "the chicken or the egg". Dang it people, these guys in Washington are taking away your future and you are trying to make a philosophical connection with politicians. The world is moving and China is not playing "pettycake". They are playing for keeps. So stop this Republican vs Democrat stuff and start screaming for Washington to stop creating debts they are not suppose to pay. But that seems something called a balanced budget. Is the premier empire in the world (hm..that's us) ready to balance all our expenses? ????

  • Report this Comment On January 11, 2013, at 8:23 AM, Deafinvestor wrote:

    The problem we have that the author ignores is that we are spending based on the 2009 budget, established by the democrats in 2008. Harry Reid has been operating our Country for three years with out a budget and refuses to allow any budget discussion (this required by law every year) we are borrowing more than 40% of every dollar spent, without a plan on how we will deal with the ever growing interest on this debt.

    I could care less who is a democrat or republican, but I do care about balanced budgets, out of control spending and returning to somewhat fiscal sanity!

  • Report this Comment On January 11, 2013, at 8:31 AM, Deafinvestor wrote:

    We take in 2.3 Trillion - Spending 3.7 Trillion - put 1.4 Trillion on the National credit card.

    No Problem..... REALLY?--- Sorry, I just do not get supposed smart people not getting this issue. I guess ignorance is bliss.

  • Report this Comment On January 11, 2013, at 8:56 AM, TMFMorgan wrote:

    <<without a plan on how we will deal with the ever growing interest on this debt.>>

    Here's that ever-growing interest bill:

    1995: $232 billion

    1998: $241 billion

    2008: $252 billion

    2012: $224 billion

    <<No Problem..... REALLY?>>

    No one said that. It's definitely a problem in the long run.

  • Report this Comment On January 11, 2013, at 10:30 AM, Deafinvestor wrote:

    Could this be due to the interest rates on bonds being at near 0% for the last 3 years and we are buying our own debt in record amounts. What happens when inflation kicks in and we have to raise the interest rates on our bonds to fight inflation to slow things down, What will be the interest on our growing debt then as they roll over?

    It is obvious this admin and congress does not care long term about our economy or our ability to repay our debt. As soon as the bond market realizes this we are in deep trouble.

  • Report this Comment On January 11, 2013, at 1:01 PM, PeakOilBill wrote:

    The mostly millionaires in the Senate will certainly vote to raise it because they don't want to be poor after the economy collapses if they don't raise it. Not to mention the threat of a revolution. Remember 2008, "martial law" from Paulson?

    The folks in the House aren't as smart. The Democrats will go along with Obama. A few moderate Republicans will join them, after they get phone calls from their wealthy backers threatening them with a VERY well funded opponent at the polls in a couple of years if they don't vote 'yes' "IMMEDIATELY !!!"

    The debt ceiling WILL be raised, probably after a brief crisis of a government shutdown.

  • Report this Comment On January 11, 2013, at 1:14 PM, VOLCANOPUKER wrote:

    I like it when those who decry high taxes want to...

    - pay higher interest rates on debt so our taxes go to pay more for nothing in return,

    -create a bond crisis so everything costs more and cause state and municipality budgets to explode

    all in the name of cutting the budget of wasteful spending with money we don't have by threatening to not pay our debt...

  • Report this Comment On January 11, 2013, at 1:17 PM, Swoop1918 wrote:

    One thing that never seems to get emphasized is that by refusing to raise the debt ceiling and pay its bills on time, Congress would be reneging on the government's debts to the American people. Us.

    For example, in the "If/Then" chart above, Defense Vendor Payments don't just mean Raytheon and General Dynamics. They include thousands of small businesses who signed contracts with the federal government and depend on being paid on time in order to keep their production running and their employees on the payroll. If Congress breaches those contracts, those businesses have to lay off or shut down.

    And I seriously wonder whether the people advocating a debt ceiling showdown will be willing to stand in front of our soldiers in Afghanistan and explain to them why their families' paychecks will be delayed.

    This is good for America? Baloney. It's a phony crisis ginned up for partisan political purposes. And that's all.

  • Report this Comment On January 11, 2013, at 1:31 PM, Deafinvestor wrote:

    For those want to raise the debt ceiling without decreasing our Trillion plus yearly deficit spending. Without this showdown, when do you think we will ever address our deficit spending? why not now?

    This isn't about taxes or income to the government now, that argument was last month. The argument now is all about wasteful over spending. When will we wake up and notice that you can not keep spending money you do not have without a consequence.

    This is not about politics, It is now much bigger than that now. Its about the financial future of our kids and grand kids and whether our country remains the financial power that it has been.

  • Report this Comment On January 11, 2013, at 1:51 PM, ericandmisti wrote:

    I agree with other comments that the article does show a clear liberal slant. I think the debt ceiling ultimately needs to be raised, but that it would be irresponsible for Republicans (or anyone else) to raise it without first putting concrete spending cuts in place. I would say at a minimum cutting 5 trillion out of the next 10 year plan. This is their only opportunity. Obama and the Democrats are not going to cut anything unless they have to. The level of debt and rate that it is increasing is incredible. The deficits of the last 5 years are way out of line with the amount of overspending that ever existed in the past. The US already owes more than it can possibly pay (already over $50,000 for every man, woman and child).That is in addition to government pensions, social security and medicaire obligations that are only increasing. My family can't pay it's share of that debt and I am in the group who actually does pay taxes. Where is this money supposed to come from? It is delusional to think some tax hikes on the rich will take care of the problem. There aren't enough rich people to cover the deficit if they were taxed at 100%.

    At some point Congress and the President need to act like adults and line up spending with reality. We saw in the last election that the majority is stupid and will vote for whoever promises to give them the most. It doesn't matter what programs people like and feel good about. We as individuals cannot spend more every year than we take in without eventually winding up bankrupt and neither can a country. It is time for the government to make a plan and start moving in the right direction.

    Eric

  • Report this Comment On January 11, 2013, at 1:52 PM, mjtri wrote:

    Not increasing the debt ceiling is not the same as defaulting on our debt. This article seems more like a Washington Post political article than a Fool one.

  • Report this Comment On January 11, 2013, at 1:59 PM, TMFMorgan wrote:

    <<Not increasing the debt ceiling is not the same as defaulting on our debt. >>

    If bills legally have to be paid on a first-come first-serve basis and there isn't enough cash to pay interest, it is precisely default.

  • Report this Comment On January 11, 2013, at 2:08 PM, TMFMorgan wrote:

    Here's a clear example of how not raising the debt ceiling would be default:

    February 15th is the projected first day the Treasury would be out of cash without raising the debt ceiling. On that day, the Treasury is expected to receive $9 billion in tax revenue, and owe a $30 billion debt interest payment.

    Even though our annual tax revenue is more than enough (12x) to cover the interest bill, revenue and expenses are lumpy and don't match when the bills need to be paid.

    Worth repeating: Revenue will not cover interest payments on February 15th. It is default.

    http://cdn.theatlantic.com/static/mt/assets/business/assets_...

  • Report this Comment On January 11, 2013, at 3:43 PM, Deafinvestor wrote:

    I don't think anyone actually wants to default, but it's time for the President to realize that he needs to honestly cut spending THIS YEAR and not propose cuts after he and all his friends in congress are gone, years 5 through 10 like they always propose and never seems to happen. (Clinton did it and blamed it on the republicans) it seemed to work for him, I believe everyone is not stupid enough to fall for pie in the sky 10 year political budgeting again. It's really simple now, cut spending now drastically and raise the debt ceiling and our country will finally be doing something about our out of control financial situation.

  • Report this Comment On January 11, 2013, at 4:01 PM, Deafinvestor wrote:

    This ball is squarely in the Presidents lap, either start negotiating with republicans about cutting spending now, or face a debt crisis. The President needs to lead by negotiating rather than just say no to cuts in spending. And please Mr President, stop calling it investing. No one would ever invest in Government as your earnings per share are N|A, and we are "Fools" but not that type. Lol....

  • Report this Comment On January 11, 2013, at 5:32 PM, wiseguy61 wrote:

    <<February 15th is the projected first day the Treasury would be out of cash without raising the debt ceiling. On that day, the Treasury is expected to receive $9 billion in tax revenue, and owe a $30 billion debt interest payment.>>

    Forgive the bliss of the ignorant, but for the edification of those trying to balance this discussion, who exactly is the recipient of the "$30 billion debt interest payment"? Is this a real monetary transaction that takes place on that day or a construct of some kind?

  • Report this Comment On January 11, 2013, at 5:35 PM, TMFMorgan wrote:

    ^ It goes to those who own Treasury bonds -- individuals, corporations, municipalities, foreign investors, etc.

    Bond interest is typically paid quarterly. But since there are different series of debt, the Treasury owes interest payments most months.

  • Report this Comment On January 11, 2013, at 6:24 PM, BCWilliams wrote:

    Of course, as usual when the powers-that-be discuss the trade-offs if the debt ceiling isn't raised, no mention of eliminating foreign aide comes up. Why? The people/taxpayers/tax takers would all be in agreement that it would be a good thing. Heaven forbid! No $750M for Eqypt? What a disaster!! Arab/Islamic nations would hate us! South American nations would hate us!

    How about we bring every GI home, now, unless the nations involved pay for their presence? Big savings...

  • Report this Comment On January 11, 2013, at 10:09 PM, accountantsucker wrote:

    Morgan-Never argue with an idiot. They bring you down to their level, then beat you with experience.

    Its disturbing that fool.com readers would make the posts above, considering that the readers of this column probably have an above understanding of financial matters. I'm left believing that the commenters here are engaging in deliberate ignorance.

    Perhaps the term 'debt ceiling' is misleading to readers. 'Bond ceiling' is probably a better term. The debt that concerns most of the commenters is a balance sheet issue--accrued liabilities. The debt ceiling refers to a cash flow issue: How do we come up with enough cash to pay the debts we've already accrued. The debt (liability) exists regardless of the choice Congress makes to pay it. When Joe the Plumber overpaid his income taxes last January, the IRS accrued a liability that needs to be paid upon Joe filing his taxes. (The IRS got an interest free loan for 16 months...) Now the liability is due: How does the IRS come up with the cash to pay Joe?

    There are three options: Issue bonds, print currency, or default. But please note, cutting spending does nothing to address the issue at hand.

  • Report this Comment On January 11, 2013, at 10:18 PM, accountantsucker wrote:

    Here's another way of looking at this: Entering into a contract with someone when you have no intention of paying your bill is fraud. If you or I engaged in what Congress is doing, we would be subject to criminal charges as well as civil lawsuits.

    Let me reiterate: agreeing to something and refusing to pay for it is a CRIMINAL offense.

  • Report this Comment On January 11, 2013, at 11:44 PM, cyclelogical wrote:

    “The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.”

    ― Alexis de Tocqueville

    The number one goal of elected officials is to get re-elected! By giving tax cuts to the wealthy, they receive the contributions necessary to support their reelection campaigns. Then, they can spend tax dollars (that we don't have) on programs in order to buy votes from the rest of us. Our kids and grandkids will pay for this insanity.

    I wonder if our founding fathers ever envisioned citizen legislators becoming career politicians or their complete lack of fiscal responsibility.

  • Report this Comment On January 12, 2013, at 1:11 AM, Libertarian71 wrote:
  • Report this Comment On January 12, 2013, at 2:05 AM, DJDynamicNC wrote:

    "This ball is squarely in the Presidents lap, either start negotiating with republicans about cutting spending now, or face a debt crisis."

    It would be hard for this to be more incorrect.

    Congress selects the debt ceiling, Congress appropriates spending, Congress controls financing. This is explicitly mandated in the Constitution.

    Why you've decided the President should start negotiating is a mystery to me, because he Constitutionally has no ability to do so.

    Congress needs to solve the problem that Congress created or else Congress will be on the hook for the consequences of the bills that Congress passed and Congress authorized payment for. "President" doesn't appear in that sentence for a reason. To claim otherwise is either willful ignorance or gross misapprehension of the Constitution and the situation.

  • Report this Comment On January 12, 2013, at 2:10 AM, DJDynamicNC wrote:

    @Cycelogical: "I wonder if our founding fathers ever envisioned citizen legislators becoming career politicians or their complete lack of fiscal responsibility."

    I wonder why the extent of our founding fathers foresight is considered the be-all and end-all of acceptable debate. If our founding fathers didn't envision something that wound up happening 250 years down the road, then maybe it's just because they were human beings instead of psychics.

    More important to me than what some old dead dude thought is what living people are suffering. I don't understand why this is even controversial. People are suffering, we have the means to stop it, but we don't because our ancestors may not be worshipped properly if we don't follow the correct fiscal policy rituals.

    It's madness.

  • Report this Comment On January 12, 2013, at 2:29 AM, DJDynamicNC wrote:

    Also, the "complete lack of fiscal responsibility" is just a code phrase for "our government is spending money on things I don't agree with."

    Can the hubris. We can have policy and priority debates without devolving to disingenuous canards about how spending money on such things as art, welfare, food stamps, and other things that cause people to be able to live better lives is "complete fiscal irresponsibility."

  • Report this Comment On January 12, 2013, at 4:16 AM, cyclelogical wrote:

    To me, "complete lack of fiscal responsibility", is spending money you don't have and ending up with massive debt. I'm not arguing about the programs, just spend within your means.

    Our career politicians won't make the difficult decisions because they'll get voted out of the cushy job with the great benefits. They'll just kick the can down the road.

  • Report this Comment On January 12, 2013, at 2:36 PM, Marmadukemark wrote:

    First, it's incomprehensible for Congress to refuse to remove a big, brick wall with which a run-away train is about to collide, with such extreme blunt-force trauma, the likes of which has never been witnessed.

    With respect to Congress' inability/unwillingness to find a solution, accountsucker makes an important observation: "Its disturbing that [the article's critics] would make the posts above, considering that [they] probably have an above [average] understanding of financial matters. I'm left believing that [they] are engaging in "deliberate ignorance."

    Deliberate ignorance - I call it the Ostrich Syndrome, while psychologists have dubbed the phenomenon the "White Male Effect," an intriguing and persistent finding that white males, or at least a subset of them, are especially dismissive of certain kinds of risks, such as those related to the consequences of not raising the debt ceiling. Do a search on the term and see how many hits you get.

    This "effect" has been attributed to cultural attitudes of white males who tend to have hierarchical and individualistic worldviews. More recently, it has shown a linkage to ideology and political affiliation, promoted by white men such as Rush Limbaugh, the Koch brothers, Rupert Murdoch, George W. Bush, and many others.

    The White Man Effect will have a liberal slant in that the White Men referred to in the theory tend to be conservative, with an affiliation to the Republican party, and especially the Tea Party.

    I just learned of this phenomenon, and what researchers have proposed as to its cause, so please don't flame me for pointing it out. I take the same stance as an earlier poster who thinks that this type of article may not fit within the borders of Fooldom.

  • Report this Comment On January 12, 2013, at 9:21 PM, eddietheinvestor wrote:

    It's very disappointing that a few people, as in the previous post, in this discussion who take the liberal position bring up race, The argument against excessive debt is that the huge debt is bad for our country and has serious, negative economic ramifications for all Americans Yet people who want to keep increasing the debt without limit and without reducing spending say that anyone who disagrees with them (or President Obama) is a racist. Playing the race card to inhibit discussion and debate, and to suggest that anyone who disagrees with you must be racist and misguided, is unfortunate. Race and political affiliation are not the issue. Excessive, uncontrollable debt has bad consequences for people of all races and political affiliations. Let's keep the race card out of the discussion.

  • Report this Comment On January 13, 2013, at 2:30 AM, foolishlycuriose wrote:

    There is another option that the author did not mention. Neither did any of the commentors up to this point. In simple terms its called 'nationalizing the debt'. It means that Congress votes to end the charter of the Federal Reserve Bank (the Fed) thereby restoring the power to coin money to our government without incurring a debt every time our country needs to pay its bills. Yes there would be alot of related issues that need to be sorted out but why do We The People continue to ignore the fact that the Fed creates 'money' out of thin air and then charges our government interest on that loan which is passed onto us in the form of debt. How about We consider a sustainable solution to the debt ceiling-deficit debate instead of arguing over which party or President is responsible for it? The simple truth is that they all are since 1913 and so are We for not reading the fine print. Sometimes it pays not to be foolish.

  • Report this Comment On January 13, 2013, at 3:39 PM, JCoeur wrote:

    Those who think that freezing the debt limit will reduce spending are delusional. The spending has already occurred. Thus they would not only have to freeze the limit, but find a way to write a law that revokes enough obligations to get back under the limit and still (hopefully) operate the government. If they do find such a way, you can be sure who will get screwed. Hint: Not any big donors. Then the only question would be, who can successfully pin the blame on who?

  • Report this Comment On January 13, 2013, at 4:56 PM, devoish wrote:

    Nice post, nice answers.

    If you do not want the Government to be in debt, require that taxes cover all spending. That's closer to how we handled finance when the country was younger - mostly import tarrifs.

    Ultimately though its our Government, we own it and its debt so the first bill I don't pay is the tax refunds. Mine included.

    The second bill I don't pay is the interest on the debt. We are trying to reduce borrowing after all, and defaulting on debt will reduce our ability to borrow pretty quick.

    Third bill I don't pay- the defense bill. I'm really not interested in protecting "our" interests overseas, because I think it has been a pretty long time since "our" interests were "most of our" interests.

    Of course, if since the 60s minimum wage had kept up with income growth this years income tax receipts would be 1.3 trillion higher, and we would all be paying for our government, not paying interest to a few lenders for our government.

    Best wishes,

    Steven

  • Report this Comment On January 13, 2013, at 8:47 PM, Deafinvestor wrote:

    With regards to negotiating, who do you think the democrats are following in lock step? Pelosi? Reed? Lol... It's the president and their far left wing of the party! The President is the one who pushed and didn't give on the so called fiscal cliff, now it's the President who isvthe one who should show some leadership and work something out now with the House and those like Paul Ryan. Maybe he could use some of his own Debt Commissions suggestions. THE TIME IS NOW NOT FEB 15!

  • Report this Comment On January 13, 2013, at 8:50 PM, daveyjoe12 wrote:

    DJDynamic is right, of course; the Constitution is clear: Congress controls the purse strings. But the political reality is that the president is, by necessity, involved. Obama and the leaders of Congress SHOULD be in negotiations now, but, of course, they aren't.

    We really have no leadership in Washington now. We have people pursuing their own interests and the interests of their party. And of course that's always been the case, but in the past we have been fortunate that, in times of crisis, leaders have emerged.

    The trouble with our current fiscal crisis is that it's not pressing enough that we have to take action NOW. We can kick it down the road (like Congress and the President just did with the fiscal cliff deal). But the trouble is that, the longer we kick it down the road, the more painful it's going to be to get our fiscal affairs in order.

    Our fiscal problems are solvable. See Simpson/Bowles plan.

  • Report this Comment On January 13, 2013, at 8:55 PM, Deafinvestor wrote:

    What do you think would happen to the economy if we had a real deal to reduce spending substantially, cuts in every department by 15% and real tax reform which would broaden the tax base substantially, remove most deductions and increase revenue through tax reciepts and spending cuts. The markets would sky rocket or maybe they would just be looking for more QE or stimulus, lol... But we really need to start paying attention to our deficit!

  • Report this Comment On January 14, 2013, at 12:30 AM, accountantsucker wrote:

    Deafinvestor: do you really believe what you write? The president gave in on both the income levels (moved from $250k to $400k) and the payroll tax. It is pure fantasy to act as though the president (and Pelosi/Reid, et al) refused to budge. As to the result of dramatically cutting spending, EVERY CREDIBLE economist agrees that those cuts would have pushed the economy back into recession. Didn't the credit downgrade over the last debt ceiling debate do enough damage?

    Just an example: I work in homebuilding. If the government removed deductions for mortgage interest, property taxes, and a host of other subsidies, the industry consensus is that construction would crash again. Pretty much every industry in this country is intimately tied up with government spending. It is folly to believe that 'the market' would greet austerity spending with anything other than sheer horror. For what its worth, specific cuts may or may not make sense, but the time to discuss that is not over the debt, oops, I mean bond ceiling vote.

    Daveyjoe-First, with 8% unemployment and 2% GDP growth and bonds yielding negative interest rates, why would we address the deficit now? Second, remember that the "fiscal cliff" was a crisis engineered over the last bond ceiling vote. Absent the abject failure of the tea party congress and a few dozen blue dog democrats, there would be no crisis.

    Elections have consequences. The GOP was roundly defeated according to any definition of the word. Manufacturing imaginary crises is childish, irresponsible, and borderline criminal. Man up and take some action to stop the crisis mentality.

  • Report this Comment On January 14, 2013, at 11:09 AM, gnorton100 wrote:

    The Ronald Reagan quote is SO OLD that It is no longer is applicable. The US does NOT have the strongest credit in the world. It barely has any credit.

    US credit was downgraded a bit and would have completely tanked if not for the fact that the Dollar is the Reserve currency.

    Few, if any, countries are willing to buy the crap our government is putting out. China has $3 Trillion of our junk and doesn't want any more.

    US National Debt has skyrocketed from $10 Trillion to $16 Trillion under Obama.

    The screwed up budget adds over $1 Trillion each year to the National Debt

    Bernanke is printing $85 Billion per month from "thin air" to buy mortgages from banks and bonds from the government to continue the charade. That's nearly another $1 Trillion per year added to the Debt.

    I'm inclined to follow the theory of Peter Schiff, The US government has done whatever it can to prevent a recession. But a recession is really needed to reallocate resources.

    Peter was a lone voice warning of the housing bubble. He pointed out how ridiculous it was that housing prices would forever rise but he was pooh-poohed by the other top economists.

    After the POP, no one admitted they were wrong. No one admitted how ridiculous the following loans were:

    -loans to people without jobs,

    -loans with no verification of payment ability,

    -loans for interest only and

    -loans where not even interest had to be paid.

    Peter warns of a major recession, which could become a depression in 2013. i think i'll listen to his advice instead of some knucklehead pushing keynesian economics.

    For those that don't know what it is:

    It's the idea that you can borrow money until you become prosperous.

    Anyone that earns their own money, and pays ALL their bills on time every month, easily understands that debt must be paid and that the interest paid on debt merely sucks the energy out of your financial life.

  • Report this Comment On January 14, 2013, at 12:01 PM, TMFMorgan wrote:

    <<The Ronald Reagan quote is SO OLD that It is no longer is applicable. The US does NOT have the strongest credit in the world. It barely has any credit.>>

    When Reagan made the statement 10-year Treasuries yielded more than 10%. Today they yield less than 2%.

    And if quoting Reagan is SO OLD, one has to wonder why quoting the founding fathers is so prevalent.

  • Report this Comment On January 14, 2013, at 12:22 PM, sjbpa wrote:

    Most of us do not live an an annually balanced budget. I have a 30 year mortgage that at times in my life has been worth more than my net worth. So to expect a balanced budget seems naive to me as our federal system is much more complex as it should be.

    As I understand it there was much wringing of hands when our deficit was almost wiped out by Clinton. I guess the two unpaid wars took care of that. Who in the history of the world goes to war and decreases taxes? After WWII and even after the civil war taxes went up remarkably on the rich who could afford the increase.

    The pitiful increase on taxes on the rich represented by the "fiscal cliff" resolution is not nearly enough.

    If any of you really wanted to bring down the deficit you would be for increased taxes on the rich as well as fiscal responsibility going forward.

  • Report this Comment On January 14, 2013, at 12:41 PM, SkepikI wrote:

    Not when there is NO fiscal responsibility being exercised at all, sjbpa. One might as well simply burn all those extra greenbacks collected from the rich. You might find Arnott's commentary in Morgan H;s most recent article enlightening.

  • Report this Comment On January 14, 2013, at 7:12 PM, eddietheinvestor wrote:

    I agree with Morgan that quotations from the past, like the one from Reagan, do count. They tell us a lot about a person's views and consistency. Here is a March 2006 quotation from Barack Obama:

    "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. ...Increasing America’s debt weakens us domestically and internationally. Leadership means that 'the buck stops here'. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and Grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

  • Report this Comment On January 14, 2013, at 7:29 PM, Deafinvestor wrote:

    Accountantsucker, The president knew that he would not get 250k limit for the increase and he really gave nothing and refused to negotiate any spending cuts. I actually think that to make any difference at all to our deficit, we would need to make drastic changes to our tax code, by broadening the base as almost 50% do not pay federal income tax at all, lower the rates that we pay and eliminate those deductions that you mentioned as well. If we need to subsidize industry, to the point of devastating our revenue by paying off industries over the years you find yourself with a

    4,000,000 word tax code that no one can follow.

    Sjbpa, if we were a family as you compare the Fed to your own here is one for you.

    Here is your family financial picture.

    $ 21,000. Income

    $ 36,000 Expenses

    $ 14,000 every year you add to your credit card balance.

    $ 165,000 mortgage (Adjustible rate)

    $ 500,000. + of promises that you have made to your extended family, without any idea of how you will pay for it!

    And some say it's not time to solve this issue?

  • Report this Comment On January 14, 2013, at 9:43 PM, mtprx wrote:

    In 1983 Reagan signed the Surface Transportation Assistance Act of 1982 which more than doubled the tax on gasoline from 4 to 9 cents per gallon.

    While many Republicans complain about the Alternative Minimum Tax (AMT), it was President Reagan that signed the Tax Reform Act of 1986 which would ensure that more people qualify for this additional tax. I

    The tax act of 1983 increased payroll taxes for corporations further encouraging companies to outsource their workforce.

    A few Reagen facts in context. A true believer in deficit spending and willing to do something about it.

  • Report this Comment On January 15, 2013, at 3:48 AM, DJDynamicNC wrote:

    @Gnorton100 "For those that don't know what it is:

    It's the idea that you can borrow money until you become prosperous."

    That certainly does sound impossible. That's why I can't imagine any business ever borrowing money in order to invest and grow and become more prosperous, especially when interest rates are exceptionally low. What a crazy idea!

  • Report this Comment On January 16, 2013, at 4:24 PM, ILMpeeler wrote:

    sjpca: "If any of you really wanted to bring down the deficit you would be for increased taxes on the rich as well as fiscal responsibility going forward."

    Exactly how much of the money I earn is supposed to go to pay for our elitist leaders' pet projects? I am happy to pay my "fair share," but it is increasingly difficult to agree with increased taxes (that hit me, but the way) when our leaders are wasting billions on things that the government was never supposed to be involved in in the first place. What is the fair share percent number...50%? 75% like France? When we are talking about "fair," I always wonder how "fair" it was that I chose to stay in school and work my tail off for the better part of my 20s while all of my friends were partying it up and having a great time. Now that I am 45 I am some sort of evil 1%-er because I make more than $250k. I thought that was the way America was supposed to work? Last comment: Pres O has no plans to cut spending. He is counting the fact that we aren't going to be in Afganistan or Iraq at surge levels for the next 10 years as $1.2 trillion in "cuts"...that is like counting as savings another $10 trillion for not invading Canada, Russia, and China. A few more not-wars and we will be at a surplus, according to our President. Unbelievable.

  • Report this Comment On January 17, 2013, at 4:18 PM, DJDynamicNC wrote:

    "wasting billions on things that the government was never supposed to be involved in in the first place"

    You just tipped your hand. What the government is "supposed" to do is "form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity."

    Fighting poverty and providing health care sure do sound like things that promote the general welfare and insure domestic tranquility, if you ask me.

    And you do have to ask me, at least once a year, at the voting booth. And those votes have spoken.

  • Report this Comment On January 24, 2013, at 10:14 PM, skyrgr17 wrote:

    OMG!! The Mayan Prophecy is correct the world came to an end 21 Dec 12. We are now in the beginning of a new “universal cycle”!! Should have sold off in December. Caution always wins in uncertain times. I'll jump back in come spring in time to reap the benefits of earnings and then sell off again in the summer. I just love the doomsday crowd.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2186038, ~/Articles/ArticleHandler.aspx, 9/20/2014 4:26:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement