The Four Debt Ceiling Possibilities
The Four Major Possibilities For 2013
There are four likely “scenarios” for what will happen when the US Congress - and the president - come up against the limit to the Treasury’s credit card sometime in the first quarter of 2013. The first one is the most obvious. They could simply abolish or “repeal” or draw a line through the legislation which set up the debt limit in 1917. There is no shortage of eminent US historians, economists, captains of industry, politicians, legal scholars, bankers, investors and others from all walks of life advocating this procedure.
If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.
This does not mean that the debt limit will NOT be abolished. But it does mean that the new Congress convening early next year will be very reluctant to take such a step.
The second possibility is that the US government will follow the lead of one of the few other major nations which maintains a “debt limit” on its Treasury. That nation is Denmark. Denmark last raised its debt limit in December 2010. The Danish government did not mess about - they more than DOUBLED the limit from 950 Billion to 2 TRILLION Kroner. The current debt limit of the Danish government is about three times as much as their official funded debt. If the US government was to increase the Treasury’s “limit” by as big a percentage as the Danish government did in 2010, they would raise the Treasury’s debt limit from its present $US 16.394 TRILLION to almost $US 34.5 TRILLION. If they wanted as big a “buffer” between their current debt and their debt limit, they would raise the Treasury’s limit to almost $US 49 TRILLION.
Like the US, Denmark has its own currency, the Kroner. The Danes did not choose to adopt the Euro in 1999. But unlike the US, the Danish Kroner is NOT the world’s reserve currency.
The third alternative is a very popular one - especially in Democrat political circles. It was suggested by many of them during the mid 2011 crisis and was being advocated right up to a few days before the deal was cut in early August. This “solution” would be for President Obama to do an end run around the whole sorry mess in the Congress and raise the Treasury’s debt limit by executive order. The rationale for the President’s power to do this is said to reside in the Fourteenth Amendment, which begins like this: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Mr Geithner has advocated this method of getting around the Congress. So has Bill Clinton. So has the current majority leader in the Senate, Harry Reid. As these gentlemen see it, any reluctance to raise the Treasury’s debt limit or any “conditions” put on such an action is calling into question - “The validity of the public debt of the United States”. This is clearly UN-constitutional.
Mr Obama was urged to take this step in 2011 and refrained. He has now been elected for a second and last term. With no more elections to win or lose, he may not be nearly so reluctant this time.
This is the last of our four major possibilities. There are variations on all four of them, but these are the major alternatives. The US government could do what they have been doing for many decades now. They could just make another deal and go on pretending they have found a solution to an insoluble problem.
That alternative becomes fraught with danger when one considers the situation in which the Congress will be deliberating for the rest of this year and probably well into next year. The funded debt of the US Treasury has risen by more than $US 1 TRILLION in every fiscal year since 2008. Fiscal 2012 was the fifth year in a row and fiscal 2013 has begun with the debt increasing by $US 220 Billion over the first seven weeks of the year. The Fed has held its controlling rate at 0.00-0.25 percent for more than four years. They have promised to keep that rate until mid 2015. Barring a catastrophe and/or a market rebellion (which would amount to the same thing), 2013 will be the fifth straight year of the ZIRP. The Fed bought more than 60 percent of ALL the new Treasury debt sold in 2011. The final “score” for 2012 is not yet in but it is a safe bet that the total will be even higher. Recent mainstream reporting has put Fed monetisation at over 90 percent of the new longer-term Treasury debt being sold.
But there is one overriding fact which is NOT made it into the mainstream media but which has nonetheless been reported in many places and never denied by the US government or its Treasury. The budget of the US government is divided into “discretionary” and “mandatory” categories.
There is also a third category which is interest payments on existing debt but that is also mandatory. For a while now, the government has not been able to collect enough revenue to meet the demand for its mandatory payments (aka entitlements) and debt servicing (even at historically low interest rates). That means that the government could cut the “discretionary” portion of its budget to zero - AND THEY WOULD STILL BE IN DEFICIT.
Please note here that the “discretionary” portion of the budget INCLUDES military spending. Even if that was cut to ZERO - the deficit would still survive. There is absolutely no prospect of ANY reduction in the debt of the US government (or most any other government) unless and until a meat axe is taken to “entitlements”. This would involve a HUGE dismantling of the welfare state, something that neither side of US politics wants to even discuss. The situation is that simple.