Saturday, October 12, 2013

Reaching The Ceiling


Floor proceedings of the U.S. Senate | According to C-SPAN Video Library, "Video coverage of the debates originating from the chambers of the U.S. House of Representatives and the U.S. Senate is in the public domain and as such, may be used without restriction or attribution."
During this federal shutdown, there's been a lot of talk about the need to raise the "debt ceiling."  Many people, including members of congress, aren't sure what the term means, and don't understand why it needs to be raised.  Therefore, I thought it would be interesting to explore the history of the term and clarify what's being debated.

The United States first instituted a statutory debt limit with "The Second Liberty Bond Act of 1917." This legislation allows lawmakers to set limits on the  amount of debt that can be accumulated through individual categories of spending & debt. In 1939, this law was expanded to limit federal debt across the board, in order to close spending loopholes.  The "debt ceiling," which applies to the gross debt, including debt held by bond owners and creditors, became a mechanism to limit the amount of national debt that can be issued by the Treasury.

Prior to "The Budget and Impoundment Control Act of 1974," which mandated the passage of an annual all inclusive budget resolution, the debt ceiling acted as a necessary leash on federal spending.   However, now that Congress and the President need to pass budget resolutions in order to spend money, the debt ceiling has become redundant.  It essentially forces lawmakers to approve expendatures they've already ordered.

Basically, it's analogous to ordering a steak dinner, eating the meal, THEN deciding if you want to pay for it.  The moment the government passes a budget resolution, they've ordered the metaphorical meal.  Thus, deciding not to adopt the debt for it is akin to dining & dashing.

When the debt ceiling is actually reached, without an increase in the ceiling having been passed, Treasury may resort to "extraordinary measures" to temporarily finance the government's expenditures and obligations.  These measures may include suspending investments in the "G-fund" of the individual retirement funds of federal employees, and certain other federally held investments can be redeemed early.

If the debt ceiling is not raised by the time extraordinary measures are exhausted, the government will be unable to pay its financial obligations. This could theoretically cause Wall Street, and the rest of the fiscal community, to lose confidence in federally insured loans & government contracts.  If these two fiscal bedrocks become thrown into doubt, investment markets will most likely become volatile, and the global community will lose faith in U.S. backed ventures.

To prevent this calamity from occurring, Washington NEEDS to end the government shutdown and raise the debt ceiling by the 17th.  That's it.  All they have to do to prevent fiscal chaos is to agree to pay for the steak they've already ordered.

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