Scare Tactics

What would happen if Congress does not raise the debt ceiling?

Secretary of the Treasury Timothy Geithner said , "The consequences of that would be catastrophic to the United States."

Ric Mishkin, a former governor of the Federal Reserve, says, "And if you default on the debt, which has never happened in our history, we have a whole different world. If you can't trust U.S. Treasury securities, what can you trust?" He goes on to sat, "This is what they do in countries like Argentina. This is not what we do in this country."

The debt ceiling now stands at about $14.3 trillion. At the current rate of borrowing, the limit will be reached around May 16. So what is likely to happen then?

Geithner says that interest rates would soar and the stock market would plummet. "Then we have to stop paying benefits to veterans, recipients of Social Security, Medicare," Geithner said.

While statements such as these may or may not be true, none of them have anything to do with possible default on the debt. Maybe they are just scare tactics to divert public opinion so that Washington can continue doing "business as usual".

Are statements such as these actually scare tactics?

Default occurs when there is a failure to pay principle and interest on a debt. The debt ceiling absolutely does not bar either. As for interest, even in today’s stressed environment, government revenue are significantly more than enough to cover interest charges. For example, average cash receipts for the past year averaged about $218 billion per month while, over the same period, interest on the debt was only about $16 billion per month (a little more that 7% of revenue).

Clearly there is enough revenue with which to pay interest on the debt. Therefore, a default on the debt would seem to be highly unlikely.

But, that doesn't mean there is no problem. During the same period of time mentioned above, the government spent an aaverage of about $333 billion per month on other spending. That amount is clearly far in excess of the available income. The government has been borrowing money to cover what was spent. For many decades the government has been spending beyond its income and borrowing to make up the difference. The result has been an exponential growth in the amount of the national debt.

Politics is the main reason why Congress has not limited its spending. The debt ceiling was enacted precisely to curb excessive government borrowing. It was intended to be non-political and impose a barrier within which Congress could make wise decisions and limit their spending relative to available income.

However, Congress has essentially ignored the debt ceiling and gone ahead with "politics as usual" regarding their spending. Every time that the debt ceiling has been reached, Congress has voted to raise it again. The effect is as if there were no ceiling at all. The exponential growth of the debt continues in an unsustainable manner.

Each time they raise the debt ceiling, Congress hopes to avoid taking "political heat" for making the difficult choices to live within our means. Each time they increase the debt, Congress abrogates its responsibility and further indentures our nation to those who hold our debt. Sooner or later the lenders will say, "You can borrow no more" and they will dictate the terms.

In my opinion, it would border upon an act of treason for Congress to increase our debt any further.

The Debt Ceiling must not be raised!