It’s time for the squabbling kids to get out of the way and for the grown-ups to step in.
US Treasury Bonds have been renown as the safest investment in the world. Because of this, the US has never had a problem acquiring money to finance itself at a ridiculously low interest rate.
I know – financial meltdown… blah blah blah… We’ve heard it all for months. But the consequences of default are huge. (Who would have thought that the US would default before Greece?) The interest we pay on our debt would skyrocket. Investors would stop buying US Bonds and look for a more stable currency (Swiss franc?) States would find their bonds downgraded as well, and find road, bridge, and other infrastructure projects now financially out of reach.
And that isn’t eve getting into the effects of recession, which would be the inevitable result of US finances grinding to a halt.
What is a debt ceiling anyway?
Almost every comment I have heard over the past months from members of the general public get the whole debt ceiling concept wrong. In other words, most of the public watching this slo-mo car crash think the whole issue is about how much we allow the government to spend. Which is not the subject at hand.
I understand why people think this way. First, a debt ceiling (unlike a budget) doesn’t have a counterpart in people’s personal finances. You see, it works like this: Congress votes on how much money the government will spend (the budget), and then later votes on whether they will pay the bills racked up by previous budgets (the debt ceiling).
The debt ceiling has nothing to do with controlling government spending – that’s what budgets are for. Through this quirk of precedent (i.e. it’s always been done this way), Congress sets a limit on how much debt the US can hold. Raising the debt ceiling does not mean that the US deficit will go higher – that, too, is determined by the budget (or by ignoring it). We’ve already spent the money; the only question is will we pay our bills.
But the government is spending too much money…
Which brings us to the second reason people are confused: the Republicans have tied an agreement to raise the debt ceiling to commitment to cut government spending (i.e., the next budget). Why do they do this – bind together budget and debt ceiling when they are two different things? Because they can. It’s a combination that is pure politics. They know that the debt ceiling is a must pass bill, so they attach their priority of shrinking government to something that the President has to sign.
Not that there’s anything wrong with politics – it’s the way things get done in a democracy. We will never all agree on everything, so a little horse trading keeps us all moving along. The President avoids financial crises on his watch, and the Republicans get some spending cuts.
Unfortunately the public is confused, and the Republicans have taken every opportunity to keep them that way. Their message: Raising the debt ceiling = more government spending.
For example, on the campaign trail yesterday Michele Bachmann said: “I think it’s been very clear the people in Iowa do not want us to continue government spending and increase the debt ceiling.”
Spending and debt ceiling are two different things, and she knows it. The money has already been spent. If you want less government spending, then you want a smaller budget, not a smaller debt ceiling. A lower debt ceiling has no effect on government spending because no politician looks far enough ahead to care whether the budget they debate today will require a higher debt ceiling to pay for it two years later.
So where do we go from here? See my next post.
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