Raise the Roof: The U.S. Debt Ceiling

O O RAISE THE ROOF THE U.S. DEBT CEILING & THE GLOBAL IMPLICATIONS OF A DEBT DEFAULT HOW HIGH CAN WE GO? The debt ceiling was implemented and set at $11.5 billion in 1917 under the Second Liberty Bond Act of 1917. It allowed the U.S. to fund World War I by selling bonds to the public, keeping interest rates to a minimum. Since then, Congress has raised the ceiling over 100 times. The government needs to issue an additional $738 billion in →+ $738 debt above the $14.3 trillion cap to meet its obligations for the remainder of the current fiscal year. This means that to BILLION avoid raising the cap, the federal goverment would have to: $11.5 $14.294 Since 1995, Congress has • eliminate all spending on discretionary programs BILLION increased the debt ceiling (everything from the FBI, National Parks, the FAA, the VA, etc.) 1917 12 times to its current cut 70 percent of outlays for mandatory programs (such as Social Security) or TRILLION level of $14.294 trillion. • increase revenue collection by nearly two-thirds or TODAY • some combination of the three $25 According to estimates from the Congressional Budget Office, the U.S. debt limit could exceed $25 trillion in TRILLION 2021 if current laws remain in place. 2021 MULTIPLE POINTS OF VIEW "IF ANYONE WANTS TO [CAP THE DEBT CEILING), WHICH I THINK WOULD BE CATASTROPHIC "IT'S TRUE ALLOWING AMERICA TO DEFAULT WOULD BE IRRESPONSIBLE BUT IT WOULD BE MORE IRRESPONSIBLE TO RAISE THE DEBT CEILING AND UNPREDICTABLE, I THINK THEY'RE CRAZY." WITHOUT SIMULTANEOUSLY TAKING DRAMATIC STEPS TO REDUCE SPENDING AND REFORM THE BUDGET PROCESS. Jamie Dimon, CEO and Chairman of JPMorgan Chase & Co, previous Class A director of the Board of Directors of the New York Federal Reserve, speaking to the U.S. Chamber of Commerce. U.S. House Majority Leader John Boehner in a speech to the Economic Club of New York. LARGE CEILING, BRITTLE WALLS WHAT HAPPENS WHEN THE U.S. REACHES THE DEBT CEILING? Even though the U.S. hit the $14.3 trillion debt limit on Monday, the country If no agreement is reached by that date, the Treasury Department warns has not yet defaulted. By suspending payments to two federal pension funds, that payment on the following obligations would be cancelled or delayed : the Treasury Department estimates it can stave off a default until August 2. Social Security and Medicare benefits Veterans' benefits Federal worker salaries and retirement benefits Corporate and individual tax refunds Unemployment benefits to states Defense vendor payments Interest and principal payments on Treasury bonds and other securities Student loan payments Medicaid payments to states • Day-to-day operations payments to keep government facilities open Military salaries and retirement benefits LONGER-TERM CONSEQUENCES If the U.S. defaulted on the obligations outlined above, Treasury warns it could trigger a chain of events that would bring about a financial worse the one suffered in 2008. • Just like missing a payment on your credit card sends your APR through the roof, the U.S. would see its benchmark interest rates rise. • Borrowing costs for states, municipalities, corporations and individuals would rise sharply. • Equity prices and home values would decline and the value of Americans' retirement portfolios would drop. • Spending and investment would slow, • Job losses and business failures would result. • Internationally, U.S.-dollar denominated investments would lose their safe-haven status and the dollar would no longer be the dominant currency of global economic markets, putting further upward pressure on U.S. interest rates and discouraging foreign investment in the American economy. FOREIGN COUNTRIES ARE RELYING ON THE U.S. FOR THEIR INVESTMENT SECURITY: WHO OWN THE MOST U.S. DEBT? NEARLY 70% OF U.S. PUBLIC DEBT IS HELD DOMESTICALLY. But in the case of default, these countries will be the first to suffer: (Figures from February, 2011) CHINA $1154.1 B JAPAN $890.3 B UNITED KINGDOM $295.5 B OIL EXPORTERS $218.8 B BRAZIL $194.3 B Ecuador, Venezuela, Indonesia, CARIBBEAN BANKING CENTERS $169.4 B Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the TAIWAN $155.9 B United Arab Emirates, Algeria, Bahamas, Bermuda, Gabon, Libya, and Nigeria RUSSIA $ 130.5 B Cayman Islands, Netherlands Antilles HONG KONG $124.6 B and Panama, British Virgin Islands SWITZERLAND $110.4 B SO WHAT OPTIONS DOES THE U.S. HAVE TO SOLVE THE PROBLEM? At the heart of debt celing debate is the issue of the burgeoning federal budget deficit. Here's the main ways to make up for the shortfall: INCREASING REVENUE Raising taxes will give the government more ammo to fight the massive deficits while maintaining the current levels of spending, keeping government programs intact. CUT SPENDING The U.S. could keep taxes low while cutting spending across the board to cap the growth of the budget deficit. AUSTERITY This means the U.S. does what it can to pay off the deficit as quickly as possible by reducing spending, raising taxes, and increasing frugality. This option is highly unpopular amongst the lower to middle classes - those who would bear the brunt of the spending cuts. IN REALITY, IT WILL PROBABLY TAKE A MIXTURE OF MEASURES TO REIN IN GOVERNMENT DEFICITS. WHILE IT'S UNKNOWN SO FAR WHAT FORM IT WILL TAKE, WASHINGTON-WATCHERS AND BUDGET EXPERTS EXPECT THAT SOME AGREEMENT WILL BE MADE BEFORE THE AUGUST 2 DEFAULT DEADLINE BECAUSE THE CONSEQUENCES ARE TOO SEVERE NOT TO DO So. SOURCES: reuters.com | fpc.state.gov | examiner.com | gao.gov | businessinsider.com | treasury.-gov | businessinsider.com | opencrs.com | Department of the Treasury, Jan. 6 letter from Secretary Geithner mint.cor to Senator Reid | Bloomberg .com %24