The Debt Ceiling: What do we do?

The Debt Ceiling: What do we do?

For the purpose of deciding what to do about the US budget once it hits the Debt Ceiling it is helpful to understand what the Debt Ceiling is.

As of January 31, the Treasury had $215,499 billion left in statutory borrowing authority, meaning it can only issue that much more federal debt before it runs into the congressionally-mandated limit of $14.3 trillion The debt limit is the amount of debt the Treasury is legally allowed to hold outstanding. It is not a restriction on Congress’ ability to gather more income in the form of appropriations or impose new obligations. It is also not related to any future spending cuts or increases.

The current rate of borrowing is approximately $5 billion per day. If the federal government continues to borrow at this rate the projection for reaching the limit will be on March 14^th. So if the Treasury does not reduce the current borrowing or do something differently to pay the nation’s bills the government will begin defaulting on its obligations to the various creditors that hold portions of our debt.

One of the things the Treasury can do is raise the debt limit, or draw from the cash account that is kept in the Federal Reserve, and is always suppose to have a positive balance. As of February 18, 2011 the balance in the account was $40.4 Billion. Since the Federal Reserve is not allowed to make any loans to the US, the amount of our debt the cash reserve would take care of is equal to about 8 weeks at our current borrowing rate. If the Treasury reaches the debt limit even a massive spending cut by Congress would make no difference, as the Treasury would still need to pay current bills, for which it would need to issue new debt.

The Treasury has started taking some steps in slowing spending with budget cuts and tax adjustments the budget that was passed in the House would go a long way to avoid hitting the debt limit. So far the Treasury’s attempts to avoid the problem will extend the projected deadline for hitting the limit to somewhere between April 5 and May 31, 2011, as per the Treasury’s quarterly financing report. The areas where the Treasury is making adjustments are federal retirement benefits, and the Exchange Stabilization Fund, which is suppose to stabilize the reserve for currency exchange. (What is the Debt Ceiling).

The Senate is saying that the cuts proposed by the House will stall the economy.

“Just as the economy is beginning to pick up a little steam, the Republican budget would snuff out any chance of recovery,” Sen. Chuck Schumer (D-N.Y.) said in a statement. “This analysis puts a dagger through the heart of their ‘cut-and-grow’ fantasy. We need to reduce the deficit, but we must do it by striking the right balance between cutting spending and growing the economy.” (Republicans float $2 Billion a week in cuts)

The total the Republicans are proposing to cut is $4 Billion a week and would extend the projected date for reaching the limit by years instead of weeks. If neither side backs down the Federal Government will shut down by March 4^th, 2011.

My proposal is to tighten the belts of the policy makers and make as many budget cuts as possible without affecting the health and welfare of the very young, disabled, and the elderly. Reduce the size of the military overseas, raise the Social Security retirement age to 68 or 70, cut foreign aid in half, eliminate earmarks, cut the number of government contractors, eliminate frivolous agencies and grants, reduce Social Security benefits for those with high incomes, return to Clinton-era tax levels, and overhaul the tax system and medical malpractice regulations.

In short there will have to be an acceptable balance of spending cuts and tax raises to get us out of this mess. I think monetizing the debt would be a mistake unless it is for a very short time, and does not deplete our cash reserves. Moreover, allowing the Fed to start printing more money would cause inflation levels to strike a nearly fatal blow to the current middle class.

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Works Cited

Republicans float $2 Billion a week in cuts. 26 Febuary 2011 .

What is the Debt Ceiling. 26 Febuary 2011 .