Understanding the Debt Ceiling

0. Just like any other organization, the Federal Government is subject to laws of economics, probability and mathematics that it can’t change.
1. Every organization, including the Federal Government has a cash flow, related to but different from an annual summation of revenues and expenditures. For example, your local bridge club may have $600 in revenues and $600 in expenditures for the year, but if the revenue comes in at a rate of $50 per month and $300 has to be paid for the big event in February, the bridge club needs to find a way to get extra revenue up front.
2. Of course, if you have $600 in revenues and $800 in expenses each year, your organization has more than just a cash flow problem; it has a structural imbalance in its budget. Eventually, the organization will run out of money to pay for anything. If no one is watching carefully, the structural imbalance will show up as a cash-flow problem in the bridge club’s day-to-day operations, even though the problem is bigger than just the cash-flow issue.
3. On August 2, 2011, according to all reasonable estimates, the Federal Government’s cash flow will go negative, i.e. there won’t be enough money in the U.S. Treasury to cover the government’s debts. A group called the Bipartisan Policy Center, which was founded by a respectable mix of graybeards and who seem to be doing reliable and understandable work, has published a day-by-day analysis by major line item of what is expected to come in and what is scheduled to be paid out in August.
4. The anticipated August cash-flow crunch does not mean that the Federal government will immediately default on its loans. Working from BPC numbers, the government is expected to have $172.4 billion in cash available in August after the 2nd, while interest payments on debt will amount to about $29 billion. In total, the Federal government is expected to have enough money to pay only 56% of what it owes in August. Raising the debt-ceiling would allow the government to borrow the money to cover the immediate cash-flow problem. For how long would be determined by how high the limit is raised.
5. If the debt ceiling is not raised, we are into uncharted territory. Does the Federal government pay off bills in some kind of “order that they come in” until the money runs out, or does Congress or the executive branch make decisions about who gets paid?
6. If you examine the historical numbers in the bipartisan report (pg. 13), you see that the cash-flow deficit (minus borrowed or other up-front money) in this particular August is not significantly different from previous recent Augusts. This means that if the only thing that happens in the next couple of weeks is a raising of the debt ceiling, government will just keep paying out more than its takes in, until the same cash-crunch as a symptom of a structural imbalance recurs, but with an even larger debt. Borrowing forever and never paying it off cannot be infinitely sustained, even by the government; see point 0 as to why. Raising the debt ceiling in isolation, aka the David Cicilline Providence plan of keep-borrowing-then-run-away, is not a viable solution.
7. According to the BPC’s numbers and various news reports, the $111 billion dollars in spending cuts in the “cut, cap and balance” plan passed by the House (but rejected today by the Senate) – even if it all could be implemented in a single month, which is doubtful — would patch less than one month of the government’s current cash flow problem (score one for commenter jgardner03). However, the fact that big spending cuts would be needed to bring the budget into balance is not a reason to say nothing should be cut.
8. Here’s the outline of a possible solution I would tend towards at the moment: Raise the debt ceiling enough to cover the next six-months of cash flow for the government, in conjunction with the $111 billion “cut” in spending and implementation of the GDP-based spending “cap” passed by the House. Then, over the next six months, Congress would work on a program to start hitting the spending caps, and to pass a balanced budget amendment. No further increase in the debt ceiling would be on the table, unless one or maybe both of the preceding were passed by Congress.

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Russ
Russ
10 years ago

“Here’s the outline of a possible solution I would tend towards at the moment: Raise the debt ceiling enough to cover the next six-months of cash flow for the government…”
And watch the market tank into another recession as all government assets drop in value. You think uncertainty about healthcare reform caused hesitation in the markets? Hold on to your hats (and don’t buy a house).

Monique
Editor
10 years ago

“Just like any other organization, the Federal Government is subject to laws of economics, probability and mathematics that it can’t change.”
Nuh uh!!! We can spend and spend and spend and nothing will happen …
Washington, DC

Dan
Dan
10 years ago

So what you truly care about is reducing uncertainty for the business community, Russ? Here’s a bill you should be able to get behind:

H.R. 1281
Restoring Economic Certainty Act of 2011 – Prohibits federal agencies from taking any rulemaking action during the two-year period beginning 30 days after enactment of this Act. Extends any deadline for any action authorized or required to be taken before the end of such moratorium period for five months or until the end of the period, whichever is later. Specifies exceptions, including for actions that: (1) are determined to be necessary because of an imminent threat to health or safety or other emergency, for the enforcement of criminal laws, or to establish or enforce statutory rights against discrimination; or (2) pertain to a military or foreign affairs function other than procurement or to aviation safety.
Requires each federal agency to submit an economic impact statement, which shall contain a detailed estimate of the total annual costs and benefits of a regulation or rule, including the anticipated net impact on employment, on each rulemaking action that was proposed but not promulgated before the start of such moratorium. Requires any rulemaking action after the moratorium ends to include such a statement.

Russ
Russ
10 years ago

“Just like any other organization, the Federal Government is subject to laws of economics…”
Not so, and I can tell you why. The U.S. government pays debt in U.S. dollars, the reserve currency. You can argue that’s a bad thing, but it’s unike any other organization or country for that matter. I guess Andrew just prints out a few hundreds when payroll comes due?

Russ
Russ
10 years ago

So what you truly care about is reducing uncertainty for the business community, Russ?

Nah, I haven’t gone over to the fringe-right. Just pointing out that Andrew doesn’t really believe it either.

stuckhereinri
stuckhereinri
10 years ago

Economic uncertainty is one thing, the long term debt & spending is another.
What happens if/when the economy picks up? will revenue (at the current tax rates and tax base) increase enough to “pay for everything”?? Including paying off the Federal debt?
If not, then real spending cuts need to be addressed.
I still say the Fed needs to address the long term viability of Medicare/Medicaid and SSI.
These HUGE programs need to be sustainable and viable for the long term, through economic downturns and upticks, through it all. If we’re planning on having these programs around forever, then make them affordable. If that means some cuts in benefits, so be it, at least we’ll all know that we can afford it and it’ll be around 50 years from now.
We need to stop kicking the can down the road.

Tommy Cranston
Tommy Cranston
10 years ago

I think we should keep borrowing over a trillion dollars a year “forever” like the progressives want. So what if the dollar collapses and we have to pay $30 a gallon for gas? We shouldn’t be dependent on fossil fuels anyway.

Tommy Cranston
Tommy Cranston
10 years ago

Even better-let’s raise taxes on those hated “rich” to 99.9999999999999%.
What are they gonna do-take their money offshore?
It’s not like we live in a global economy…

Justin Katz
Justin Katz
10 years ago

Per Russ’s first comment:
That’s coming regardless. The government can’t have a policy of borrowing to infinity, and it’ll take but a feather on the suspended bridge to prove that there are no moorings.
Better to let the markets see that the United States is serious about returning to the first principles of government (i.e., ensuring a safe and stable society) and accept that, hey, they might actually have to invest in productive activities rather than the government’s ability to tax.

Dan
Dan
10 years ago

In Russ’s defense, I’m quite certain that he had no idea what he was actually saying. Nobody could truly believe that the Federal government is not subject to the laws of economics simply because it can print money. Economic theory is a buzzing confusing to progressives and their statements are a fumbling attempt to make sense based on Paul Krugman’s substanceless op-eds.

Warrington Faust
Warrington Faust
10 years ago

Posted by Russ “Just like any other organization, the Federal Government is subject to laws of economics…” Not so, and I can tell you why. (Granted, economics is not physics, but surely most rules apply) The U.S. government pays debt in U.S. dollars, (true)the reserve currency (I think Russ just threw this in because it sounds good. I hope Russ does not believe that there is any “reserve” backing the currency. It is a “fiat currency” which only has value because the government says it does. What backs it is the “full faith and credit” of the government. It is “the reserve currency”, only because other countries have chosen to make it so, they could change their minds) . You can argue that’s a bad thing (what is the “bad thing”), but it’s unlike any other organization or country for that matter( I am not sure what this means, as a practical matter all modern governments issue “fiat currency”). I guess Andrew just prints out a few hundreds when payroll comes due (Does Russ understand that every time we “print money”, we increase the “money supply”.As the money supply becomes greater, the value of each dollar in circulation is diluted. That leads to inflation and valueless currency. Have you noticed the price of gold?)? Much is made of the large “assets” of the U.S. government, this is doubtless true. However, they are valued in dollars. If the rest of the world no longer valued U.S. Dollars,what would we do? We would have to sell the Grand Canyon to another country whose currency still had value, then we could pay our debts in an acceptable currency. It is more likely that we would have to assign tax revenues to our creditors. That still presents the problem of a currency acceptable to… Read more »

Russ
Russ
10 years ago

“Does Russ understand that every time we ‘print money’, we increase the ‘money supply’. As the money supply becomes greater, the value of each dollar in circulation is diluted.”
Yes, of course. Like I said, you might not think that’s a good thing. I’d even agree with you in this case.
What’s clear though is that the U.S. government is unlike any other organization, unless we’re talking about those that can payoff their own debts with their own currency. I suppose companies that pay off debts with newly issued stock would be similar, but you get the idea.

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