USA Reaches Its Debt Limit

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The U.S. government hit its $14.3 trillion debt limit Monday 16th May. Running up debt at the rate of roughly $2 million every single minute, it crashed into the nation’s legal debt ceiling.

The debt limit was set in 1917 to allow the US extra borrowing power to aid its entry into World War One, and also set a ceiling to the amount of public debt the country should have. It has been increased several times since.

U.S. Treasury Secretary Timothy Geithner wrote a letter to the Congress urging “to act to increase the statutory debt limit as soon as possible. He has started a complex juggling act to postpone the date when the government no longer can pay its bills. He says that by using accounting maneuvers and shifting funds around within government accounts, he can stave off a financial crisis for the U.S. government until August 2 at the latest.

But those accounting tricks, such as tapping two federal employees pension funds for loans, would buy only 11 more weeks for the White House and Congress to strike a deal to increase the debt ceiling. After that, Geithner warned, the U.S. risks a catastrophic default on its debt.

Until Congress acts, the nation can’t legally borrow more.

If there’s no debt ceiling increase, there’s reason the U.S. couldn’t just keep paying its bond debts but temporarily cut back on other government payments until there’s a debt-ceiling deal — which could mean people not getting Social Security or welfare checks or government employees going without paychecks.

President Obama has warned on Sunday against the national and global implications of the failure to raise the US $14.3 trillion debt ceiling, saying:

“If investors around the world thought that the full faith and credit of the United States was not being backed up, if they thought that we might renege on our IOU’s, it could unravel the entire financial system.”

He continued: “We could have a worse recession than we already had, a worse financial crisis than we already had.

When you read through the news about this issue, it’s quite surprising that you find only discussions whether to increase the debt limit or not, about the measures the Treasury could employ to push back the date on which the current debt limit becomes binding and about spending cuts to reduce the deficit.

Few politicians actually question whether the government can ever repay this debt and who would look under the surface into the deeper fundamentals of the problem.

In the UK the national (government) debt currently stands at roughly £32,800 for every single person in employment. In order for the interest alone to be repaid on this debt every household will pay £1,889 a year. There is no way this debt will ever be repaid unless we fundamentally restructure our economy. Should the government even try to pay back this debt the cuts that it would have to make to public services would mean that millions of people would be thrown into unemployment, and would need to find other jobs.

All these people will require unemployment benefits whilst they look for jobs, and, should they find jobs, they will be paid with money created as debt, should the economy grow (read, indebt itself) enough to facilitate this. As the only end result of allowing banks to continue creating money in this way is another financial crisis, the end result of cutting services and paying back the national debt will only be an even bigger financial crisis, leading to an even bigger national debt.

 

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  • Trevor Bacon

    It is sad to think that in terms of events we are still fighting the phony war. So many people are still buying the government line and almost everything else. The more I look into this situation the more concerned I become. This is not the same as the seventies or the thirties, this is something on an entirely different scale. With all the problems with oil food and other resources, not to mention the population and industrialisation over of much of the world we are facing a future event of perhaps biblical proportions. We can’t produce our way out of this and we can’t print our way out of this and nor can we endlessly cook the books. Nobody in power is telling the truth about the depth of this crisis. Do what you like this sucker is baked into the system.

    http://www.youtube.com/watch?v=vpXTbgWH1Rc

  • http://ralphanomics.blogspot.com/ Ralph Musgrave

    Reducing national debts is easy (for countries that issue their own currencies). First, a significant portion of debts and deficits exist for structural reasons. And a structural deficit/debt (DD) is one that, by definition, is not intended to impart stimulus. (Look up the phrase “structural deficit” on any online dictionary, e.g. the Financial Times Lexicon).

    It follows that removing a structural DD will have no “anti-stimulatory” or deflationary effect. As to the actual mechanics of removing structural debt all one needs to do is to print money and buy back the debt (or cease rolling it over). That on its own would be too inflationary probably, so balance that with a deflationary policy, like raising taxes. As long as the deflationary effect exactly counters the inflationary effect, GDP, numbers employed, etc stay the same, while the debt comes down at any rate you like. Pre-tax incomes rise, tax also rises, while after tax incomes remain constant.

    As distinct from the structural part of DDs, there is part of DDs designed to bring stimulus. As long as stimulus is needed, obviously the deficit must stay in place. But there is no particular reason for such a deficit to result in increased debt. As both Keynes and Milton Friedman pointed out, a deficit can perfectly well accumulate as extra monetary base rather than as extra debt.

    Indeed, the basic Keynsian anti-recessionary tool – “borrow and spend” – is raving bonkers. What’s the point of a government borrowing money and paying interest for the privilege when it can print any amount of such money any time it wants?

    The above paragraphs over-simplify the issue a bit – but not by all that much. For a more detailed treatment of debt and deficit reduction along the above lines, see:

    http://mpra.ub.uni-muenchen.de/34295/1/MPRA_paper_34295.pdf

  • http://ralphanomics.blogspot.com/ Ralph Musgrave

    The above argument of mine is quite similar to Ch 39 of Ellen Brown’s book “The Web of Debt”. The chapter is entitled “Liquidating the Federal Debt Without Causing Inflation”.

    Essentially she argues that the U.S. could just print money and buy back the debt. As to those foreign holders of U.S. debt, she argues that they would’nt do much with their newly acquired cash. Most of the holders are entities which want to store wealth in the form of U.S. dollar denominated assets. Thus they would neither remove their money from the U.S., nor would they go on a spending spree and buy loads of consumer goods in the U.S., thus there would not be much of an inflationary effect.

    I think she’s a bit over optimistic. That is, I think (to repeat) that printing money and buying back WOULD have a significant inflationary effect would have to be countered with additional tax. But certainly my ideas are not a hundred miles from Ellen Brown’s.

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