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Forum Post: the debt limit [ ceiling ] does NOT limit how much we spend. It allows us to pay debts that we already owe

Posted 1 year ago on Dec. 28, 2012, 6:53 a.m. EST by bensdad (8977)
This content is user submitted and not an official statement

What’s the debt ceiling? [ from early 2011 ]

The legal limit on borrowing by the federal government. Before 1917, Congress had to approve borrowing each time it came up. In order to allow for more flexibility as the nation entered World War I, lawmakers agreed to give the federal government blanket approval for most types of borrowing — as long as the total was less than an established limit “ceiling”.
The nation’s debt is inching closer to the legal limit. According to Treasury Secretary Timothy F. Geithner, the ceiling could be breached soon

What happens if the debt ceiling is breached?

If Congress does not increase the limit, borrowed funds would not be available to pay bills previously, legally contracted for and the United States may be forced to default on its debt obligations. There’s no precedent for this situation. Treasury has never been unable to make payments as a result of reaching the debt limit. With a fragile global recovery counting on U.S. economic stability, the debt limit issue could roil international financial markets. Democrats and Republicans agree that if the debt limit is not raised we would be inviting economic catastrophe.

In the past, raising the debt ceiling has mostly been a perfunctory matter. The ceiling has been raised almost 100 times since it was established and has gone from less than $1 trillion in the 1980s to $6 trillion in the 1990s. Legislation to raise the debt limit usually prompts partisan posturing about fiscal responsibility, but little real drama. This time is different.

With the national debt at its highest point in 50 years compared with the size of the U.S. economy, the debate about the ceiling has become entwined in the larger issue about slashing the budget. The budget debate is shaping up around trying to balance two perhaps equally unpopular remedies: sharp cuts to popular government-funded programs and major tax increases. Republican lawmakers say that if they raise the limit they need a commitment from the White House for more spending cuts. The Obama administration has resisted the idea of including spending caps or other budget-process reforms in legislation to raise the debit ceiling, arguing that ensuring the government’s solvency is too important to be held hostage to blackmail on other issues.

What happens if we don’t raise the debt ceiling but continue to pay interest on our bonds? This is an option known as “prioritization.” The Bipartisan Policy Center released a report attempting to think through how this would work in practice, as it has never been attempted before. The raw numbers are chilling:


The federal government would have to cut expenditures by about $134 billion, or 10 percent of the month’s GDP. If it chose, for instance, to fund Medicare, Medicaid, Social Security, supplies for the troops and interest on our bonds, it would have to stop funding every other part of the federal government. The drop in demand, when coupled with the turmoil in the markets and the general financial uncertainty, would undoubtedly throw the economy back into a recession.
We have to roll over $500 billion in debt that month, and if there was uncertainty about how we were going to pay our bills, it is not clear we could find buyers for our debt at anything less than an exorbitant rate. In this way, “prioritization” could actually increase the deficit when interest rates WE pay on our loans quadruple or ???

What happens if we stop paying the interest on our debt? This is too scary to consider. Treasury securities sit at the base of the global financial system. They are considered so safe that the interest rate on Treasuries is called the “riskless rate of return,” as the market assumes there is no chance of default under any circumstances. Almost all other types of debt — mortgages, credit card, auto loans, business loans, hospital bonds, etc. — are yoked to Treasuries. Almost all major financial players hold substantial portfolios of Treasuries or Treasury-related debt in order to buffer themselves against financial shocks. Consider that the 2007 financial crisis was caused by the market realizing it had to reassess the risk of bonds based on subprime mortgages. If the market has to reassess the risk of Treasuries, the resulting financial crisis will be beyond anything we’ve ever seen in this country.

30 Comments

30 Comments


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[-] 3 points by TrevorMnemonic (5827) 1 year ago

the "debt" is a scam.

Debt to who? Why do we allow this "debt" instead of just reforming monetary policy to fund society through infrastructure, social programs, etc, and completely change the system?

Because the capitalists pigs are working hard against real reform.

[-] 0 points by bensdad (8977) 1 year ago

you may not like the debt, but it is not a scam
America borrows money & spends it - primaril becaus the big corp that may hav $2B to spend to buiold - will not spend
how do you propose forcing them to spend?

[-] 2 points by TrevorMnemonic (5827) 1 year ago

it's a scam. It's a scam on the middle class, and paying interest on a bogus debt is a waste of tax dollars.

The "debt" is a scam. Debt to who? Who or what is owed the money? 1 trillion to China? Then what?

You know where the Federal Reserve got the money to buy government debt? They created it from nothing and we pay interest on that. Does that make sense to you?

Instead of creating trillions of dollars and giving them to banks to circulate and pocket for the 1%.... why not have the trillions go through the economy through infrastructure spending and job creation and social programs, public transportation etc? One of the causes of inflation is caused when new money is created without the creation of new wealth. An example of new and REAL wealth is the creation of infrastructure. It's a pretty far left idea, but that's how I roll. Credit to Dennis Kucinich of course.

[-] 0 points by OTP (-203) from Tampa, FL 1 year ago

You get people to spend by proposing good opportunities.

This country is not one right now.

[-] 2 points by bensdad (8977) 1 year ago

You may think that - but the world does not
American debt is the most reliable place to put your money
unless we dont raise the ceiling


check out the interest rate on
2011 US government bonds .
2012 US government bonds - AFTER this year's ceiling battle 2012 French governmment bonds
2012 Mexico governmment bonds
2012 Japan governmment bonds


the lower the rate, the safer the investment

[-] 0 points by OTP (-203) from Tampa, FL 1 year ago

Not really. Please explain this chart:

http://seekingalpha.com/article/220695-chart-of-the-week-10-year-treasury-note-yields-since-1990

ZIRP is a motherfucker.

[-] 2 points by bensdad (8977) 1 year ago

As I indicated, my concern is how the debt ceiling battle changed our interest rates late 2011 - late 2012
and comparing risk-reward in other countries TODAY

I am not referencing before 2011

[-] 0 points by OTP (-203) from Tampa, FL 1 year ago

Low bond rates are just another method to push retirement accounts into the stock market, when the only thing propping it up is the Fed injections.

[-] 1 points by bensdad (8977) 1 year ago

bond rates are set by auction ( I believe )
If America tried to sell 0.5% bonds - no one would buy
If America tried to sell 10% bonds - everyone would buy

[-] 1 points by OTP (-203) from Tampa, FL 1 year ago

Rates are set by central planners. They are junk.

http://www.moneynews.com/Headline/fed-debt-Treasury/2012/03/28/id/434106

[-] 1 points by bensdad (8977) 1 year ago

Specifically-
US 10 year treasury in 7/2012 =1.43%
then we had the debt ceiling battle
rate went up 20% to 1.7% in 12/2012
this battle cost America billions


if we have another battle and then raise the ceileing,
I would guess at least a 30% jump to 2.2%


if we dont raise the ceiling - it will go over 3%
because there will be fewer buyers


FYI - from the US treasury Department: You can find out when Treasury securities will be auctioned by viewing the recent announcements of pending auctions. Once an auction is announced, your institution may submit a bid for the security. You may bid directly through TreasuryDirect (except for Cash Management Bills), TAAPS (with an established account), or you can make arrangements to purchase securities through a broker, dealer, or financial institution.

The auction announcement details:

Amount of the security being offered Auction date Issue date Maturity date Terms and conditions of the offering Noncompetitive and competitive bidding close times Other pertinent information
NOTE : NO INTEREST RATE IS SET

Bidding
Competitive bidding is limited to 35% of the offering amount for each bidder,
and a bidder specifies the rate or yield that is acceptable.

At the close of an auction, Treasury awards all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order of their rate or yield (lowest to highest)
until the quantity of awarded bids reaches the offering amount.
All bidders will receive the same rate or yield at the highest accepted bid


NOT SET BY CENTRAL PLANNERS.


maybe the United States Treasury Department is wrong?
I'm glad I put ( I believe ) on my post
maybe next time you will too.

[-] 0 points by VQkag2 (16478) 1 year ago

but still US bonds are the most popular and safest place for worldwide investments.

How do you explain that?

[-] 0 points by VQkag2 (16478) 1 year ago

But the whole planet is parking their money in US bonds. So I guess you are wrong, we are a good opportunity.

[-] 3 points by bensdad (8977) 1 year ago

the last time the Rs blackmailed America, interest that we paid on our debt increased by billions of dollars because we scared the people who loaned us money


imagine what would happen if you had to renegotiate your home loan every month and you waled into the bank - stoned

[-] 2 points by DKAtoday (26307) from Coon Rapids, MN 1 year ago

The Bankster would likely look at the clock on the wall - look out the window at the bar across the street - sigh - think about the bottle hidden in the desk............................ the bindle of coke in a pocket ...get a little anxious........

[-] 3 points by bensdad (8977) 1 year ago

How to avoid blackmail by the Rs:

NY Times WASHINGTON — A few days ago, former President Bill Clinton identified a constitutional escape hatch should President Obama and Congress fail to come to terms on a deficit reduction plan before the government hits its borrowing ceiling.
He pointed to a provision in the 14th Amendment, saying he would unilaterally invoke it “without hesitation” to raise the debt ceiling, “and force the courts to stop me.”
Adding another element of uncertainty, and possible court battles, to the debate do not seem to appeal to the White House. And it is, in any event, not clear that the nation’s creditors would continue to lend money to the United States were the president to take unilateral action.

The provision in question, Section 4 of the amendment, was meant to ensure the payment of Union debts after the Civil War and to disavow Confederate ones. But it was written in broader terms.


“The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”


The Supreme Court has said in passing that those words have outlived the historical moment that gave rise to them.

“While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the government issued during the Civil War,” Chief Justice Charles Evans Hughes wrote for the court in 1935, “its language indicates a broader connotation.”

In recent weeks, law professors have been trying to puzzle out the meaning and relevance of the provision. Some have joined Mr. Clinton in saying it allows Mr. Obama to ignore the debt ceiling. Others say it applies only to Congress and only to outright default on existing debts. Still others say the president may do what he wants in an emergency, with or without the authority of the 14th Amendment.

Jack M. Balkin, a law professor at Yale, said it was possible to infer a broader principle. “You’re not supposed to hold the validity of the public debt hostage to achieve political ends,” Mr. Balkin said. He added, though, that “Section 4 is a fail-safe that only comes into operation when everything else is exhausted.”
“This is not a circumstance,” said Laurence H. Tribe, a law professor at Harvard, “in which the courts have any plausible point of entry.”

Professor Balkin agreed. “This is largely a political question,” he said. “It is unlikely courts would decide these questions.”

Some law professors have put forward possible legal claims that might overcome threshold requirements for lawsuits, like the one in which plaintiffs show that they have been directly injured and so have standing to sue. “It’s unthinkable,” Professor Tribe responded, “that the courts would allow a gimmicky lawsuit to proceed.”

The president, moreover, can move quickly, but court cases take time. “At the point at which the economy is melting down, who cares what the Supreme Court is going to say?” Professor Balkin said. “It’s the president’s duty to save the Republic.”

Another possible reaction to unilateral action from Mr. Obama is impeachment. Professor Tribe said that was “not politically a very plausible scenario.”

Professor Levinson was less certain. Impeachment by the House of Representatives “seems to me quite likely.” But, he added, “it is also literally unimaginable that the Senate would convict.”

A third possible response is what some law professors call “popular constitutionalism.” The meaning of the Constitution, these professors say, is in the end what the public believes it to be. The president and members of Congress may thus pay a political price for taking stands at odds with what the public understands to be their constitutional obligations.

[-] 1 points by jph (2652) 1 year ago

When the only way you or I can pay the interest on the loans we have made, is to borrow more, we are called bankrupt! How is it different for the govt.? This is a simple shell game where the debt is pushed onto our children and children's children, so the banksters can continue to take the endless interest, without ever doing anything for it.

The current monetary system is a pyramid scam! The 1% continue their reign of terror through this mechanism of endless interest on endless debt. It does not need to be this way.., in fact it can not longer continue!

The only true solution is to brake the cycle, and refuse to pay the unnecessary usury (or excessive interest) on the vast government debt. A debt created by the 1% (through their corrupt politicians, and mindless war spending as one example), for the benefit of the 1%,. at the expense of all the rest of humanity, and the continued plundering, to extinction, of the world we live in,. . This is not a left / right or R vs D issue, this is an issue of the basic money system being broken beyond repair, and the time to change it having come!

[-] 0 points by bensdad (8977) 1 year ago

Check some economists - Paul Krugman to start
NOT paying our debt will make 1929 look like a party. Do you know what rate the USA pays on the money it borrows?
If your car has a squeak, do you blow it up with you inside?
can you cite any economist who agrees with you?


Experts were divided on how bad the effects of not raising the debt ceiling for a short period would be on the economy. While some leading economists, including Republican adviser Douglas Holtz-Eakin, suggested even a brief failure to meet US obligations could have devastating long-term consequences, others argued that the market would write it off as a Congressional dispute and return to normal once the immediate crisis was resolved.[50] Some argued that the worst outcome would be if the US failed to pay interest and/or principal on the national debt to bondholders, thereby defaulting on its sovereign debt.[51] Former Treasury Secretary Lawrence Summers warned in July 2011 that the consequences of such a default would be higher borrowing costs for the US government (as much as one percent or $150 billion/year in additional interest costs) and the equivalent of bank runs on the money markets and other financial markets, potentially as severe as those of September 2008.[52]

In January 2011 Treasury Secretary Timothy Geithner warned that "failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."[53]

Senators Pat Toomey and Jim DeMint expressed deep concern that administration officials were stating or implying that failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis:[54] "We believe it is irresponsible and harmful for you to sow the seeds of doubt in the market regarding the full faith and credit of the United States and ask that you set the record straight – that you will use all available Treasury funds necessary to prevent default while Congress addresses the looming debt crisis."[55]

Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argued that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matured, which it would be unable to do under any conceivable circumstance. He concluded: "There is no alternative to enactment of a timely increase in the debt limit."[56] On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163[57]] that would require the Treasury to prioritize payments to service the national debt over other obligations.[58] (The bill was cleared by its committee for consideration the next day and added to the Senate "calendar of business", but no further action had occurred by mid-August 2011.[59])

Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as ten percent of GDP overnight, leading to a corresponding fall in aggregate demand. Economists believe that such a significant shock, if sustained, would reverse the economic recovery and send the country into a recession.[60][61]

[-] 1 points by jph (2652) 1 year ago

You quote a bunch of people that work inside this, now clearly, broke-ass system? Proving what exactly? That those hopelessly addicted to "the system" will fight to keep it in power? Wow, surprising!

I am saying that the "debt" and the usury interest that has been compounded since before you or I were born is the injustice, and this debt should be dissolved. In fact, we should go after those that have been collecting it!

Yes, there will be a financial "crisis" when the reality of endless perpetual debt created for the 1% 's endless and perpetual greed is ended. This is a good thing! We can only then move to a system of exchange not burdened with the vampire class "sucking the blood from the sufferers" (to quote Bob Marley).

use; permaculture, slowmoney, relocalize, degrowth, etc.

[-] 0 points by bensdad (8977) 1 year ago

I ask you again- on who do you base your opinion ?
NOT paying our debt will make 1929 look like a party.
Do you know what rate the USA pays on the money it borrows?
If your car has a squeak, do you blow it up with you inside?
can you cite any economist who agrees with you?

if you go to a doctor and he says you need to take an anti-biotic to resolve an infection - do you ignore his advice because he has an MD from inside the system?

[-] 1 points by jph (2652) 1 year ago

You repeat yourself,. Why will not paying the perpetual interest to the 1% users change the physical wealth of the nation? You are eating the jello and drinking the cool-aid, IMHO.

Why do you defer to "experts" when you have the power of reason? The issue is not at all as complex as they media and banksters would have you believe.

There are WHOLE schools of thought on just this issue,. who would you like me to quote? SEE; permaculture, slowmoney, relocalize, degrowth, etc.

For just one see; http://occupywallst.org/forum/josh-farley-rethinking-economic-growth/

or do some personal research; Chris Martenson, Gerald Celente, Max Keiser, and on and on,. all have valuable information for you.

[-] 1 points by DKAtoday (26307) from Coon Rapids, MN 1 year ago

Just a thought BD :

If the people were fully awake and aware and willing to act - they would demand that the usury/interest that this country charges itself/The People be dismissed. All payments into the system should be to pay down the debt and used for needed projects that would strengthen the economy by getting people employed doing good and necessary work - people who would then be paying into the economy - WITH - their "living" wage's. Charging interest to the national debt is a scam.

[-] 1 points by bensdad (8977) 1 year ago

we are boxed in by the tp
we need to spend MORE
we should be able to tax the rich & corps but grover + tp + alec + koch have the power to stop us from getting the tax laws we need
to spend more, we need to borrow more & put people to work like FDR did

[-] 1 points by OTP (-203) from Tampa, FL 1 year ago

Here is a graph from NPR:

http://www.npr.org/blogs/money/2012/04/13/150441259/what-america-pays-in-taxes

At what rate would you have to tax corporations to close the over 1 Trillion dollar deficit, soon to be closer to 2 Trillion, on a yearly basis? Not even counting closing the 16trillion hole. Just to brake even.

[-] 2 points by bensdad (8977) 1 year ago

Third quarter pre tax corporate profits were $1.95T and going up -
so $7.8T for a year
Use a simple corporate AMT of 20% produces $1,560,000,000,000
companies presently pay only $0.2T so this one change - net -
produces $1,360,000,000,000


restore the old estate tax
0.5% sock transfer tax [ we used to have one ]
tax capital gains [ but not dividends ] as regular interest

[-] 0 points by OTP (-203) from Tampa, FL 1 year ago

Where are the 1.75T profits number coming from?

[-] 2 points by bensdad (8977) 1 year ago

Thank you for asking
I am so fed up with people here who make generalized claims & pull facts out of their ass.
I re-read my source - and PRE-tax profits should have been $1.95T
I updated my post

SOURCE
http://money.cnn.com/2012/12/03/news/economy/record-corporate-profits/index.html

[-] 1 points by DKAtoday (26307) from Coon Rapids, MN 1 year ago

Feed your spirit and share that with those around you. You might be surprised at what turns up UN-forseen. {:-])

[-] 1 points by VQkag2 (16478) 1 year ago

Political use of Debt limit is just conservative schemes to cut spending the benefits the 99%.

[-] 0 points by OTP (-203) from Tampa, FL 1 year ago

There is going to be a massive financial crisis regardless of whether they raise the ceiling or not. No one has the will to do what is needed to stop things. The banks are still robbing, the bulk of the problems fall on the middle class, and the people still arent willing to get engaged.

Its not a matter of if, but of when.

If Congress didnt raise it, I would hope they use 4% of the over 2 Trillion they collect to pay the interest, and maybe sacrifice the military instead. Of course they wont do that though.

They will keep spending money on Wall St and bombing the planet until they have completely devastated the country, and then go and consolidate and provide another great solution. History will repeat itself. It always does.

The only thing that can turn this around is the people. Im not sure they have the will.