- Last Updated on Wednesday, 20 July 2011 00:00
- Published on Wednesday, 20 July 2011 00:00
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The United States, for all the woes of our current economy, for all the worry we have about China eclipsing us as a world power, is still, going away, the world’s largest economy. We employ over 139 million people and generate a staggering Gross Domestic Product of $14.8 Trillion. These are encouraging numbers. But behind this massive economic engine is a government that is very close to defaulting on its own financial obligations.
If the government were a business, we might be able to work out a deal with our creditors or perhaps even declare bankruptcy. But that’s not an option. Our creditors are far too numerous, our debts too big, and as for bankruptcy, we can’t do that either. Even states hardly ever do that. In fact, only one state in our nation’s history, Arkansas, during the height of the Great Depression, has ever declared bankruptcy. For governments, it’s just not an alternative.
So, what exactly do we do when the debt ceiling, our own internal permission to borrow, runs out? The logical course might be to extend that limit and cover your bills. But that’s not the way this is playing
out. Under the Liberty Bond Act of 1917, which first established a debt limit, if the government wants to borrow more than the current limit, it has to pass a bill increasing that limit. This used to be done all the time, but with the new conservative majority in the house, and new conservative members of the Senate, the Congress has made it clear that it won’t raise the debt limit unless at the same time there is a massive cut in spending. Given how out of control our spending has become, this isn’t unreasonable. The President, for his part, is willing to make cuts, but he also wants some increase in taxes. And that has been the sticking point. The Republicans don’t want any tax increases at all. And so, for weeks, the President and the Congress have been talking, exchange sound bites, and jockeying for position, in trying to craft a deal. But that agreement has been elusive. So, if Aug. 2 comes around, and the government finds itself without the ability to borrow, a fair question is what happens next?
The first thing to remember is that the Federal Government isn’t broke in the conventional sense. It has revenue. It’s just that over a third of the money it takes in is borrowed and thanks to its own internal rules we can’t borrow any more. So, with the spigot turned off on a third of our revenue, paying the bills becomes a problem.
Some, like Michele Bachmann, a Republican Congresswoman, and candidate for President, think the claim by President Obama that Uncle Sam won’t be able to issue the August Social Security checks is a scare tactic. She could be right. However, while overall, the Federal government, could, under optimum circumstances, shift and move money to cover its most pressing bills, it’s not that easy. The Federal Government, just like the rest of us, has a checking account – accounts that it uses to meet day-to-day obligations. However, the problem is that in early August, because the government can’t borrow any more, the government won’t have enough in those accounts to cover its obligations and this includes the really big ticket items such as Social Security, Veteran Benefits, government salaries, contracts, and yes, most upsetting to the markets, interest on its bonds.
At the moment, the question for the treasury is just what payments does it make first. How does it allocate the money it does have, and what happens if, say, only some social security payments go out, and not others, or if we delay interest payments to certain classes of bonds, while letting others go unpaid. Will the stock market drop by hundreds of points, will interest rates suddenly rise, and will the U.S. government all at once see its bond rating fall.
The answer could be yes. All these things could happen, but more than likely, they won’t. Or at least they won’t happen all at once. World markets could well be distressed, indices will probably fall, and interest rates may rise, but recognizing that this is the largest and most productive economy on earth, the world’s financial markets may cut us a little slack. After all, with the entire world’s financial markets already in turmoil, while distressing, America’s internal disagreement over its debt ceiling doesn’t represent a fundamental failure in the U.S. economy.
Also, like it or not, in a democracy, particularly in one that disperses power like ours does, coming to agreement sometimes takes a crisis. We have allowed our spending to outpace our receipts for over a decade. Republicans and Democrats alike are at fault and no, sorry Tea Partiers, Barack Obama didn’t create this problem all by himself. But now, like it or not, the Congress and the President, in the face of profound domestic and international pressure, will have to come to a solution. One that fixes the problem over the long term, and in the words of President Obama, “doesn’t kick the can down the road.” And if it takes a crisis, and some pain, to force that solution, then that’s just the way it’s going to be.