What is the Debt Ceiling–Is it Critical?

The big debate on the table today is raising the DEBT CEILING but I doubt if many, including Congressmen, Senators and the President even really know what it is or how it came about.  To understand the Debt Ceiling, a short set-up for the time it was created may be helpful.  The time was in the first decade of the 1900’s which was accented by a series of financial crisis that was topped off by the “Panic of 1907” or also known as the “1907 Banker’s Panic”.  The stock market fell to 50% of its prior year high and we were in the middle of a recession.  (sound familiar so far?)  Personal, business and bank bankruptcies were the norm and banks were suffering from a lack of liquidity.  (Hmmm, Deja Vu)  This Panic of 1907 led to the creation of the Federal Reserve System that was supposed to eliminate swings in financial liquidity, make recessions more shallow, and generally insure a more stable economy and a stable economic environment.  (Well, so much for that idea.)

Unfortunately, as governments will be prone to do, our Federal Government was spending more than it took in thus increasing our National Debt to what was then alarming levels.  With World War I raging and our merchant ships under attack by the Germans, President Wilson Declared war with Germany on April 6, 1917.  The cost of the war would have to be paid for so Congress passed the Second Liberty Bond act that basically created a longer term borrowing mechanism and established the statutory limit on the Federal Debt. 

The first goal for establishing a Debt Ceiling was to provide for a planning tool for the Secretary of the Treasury in the planned issuance of Federal Government Debt instruments, bonds etc., so that the Secretary knew where the limits were and could secure debt as needed below the limit. 

The second goal was to make sure that Congress had to approve of any increases to the Debt Ceiling in a very public way so the taxpayers knew who much the Federal Government was allowed to borrow, or another way of looking at it, so the taxpayers knew when Congress committed the taxpayers to having to repay more debt.  (So much for that threat scaring politicians)

The third goal was to provide some cushion in the government’s ability to borrow short-term capital when tax revenues did not come in when outlays are required.  It as a mechanism much like a line of credit for businesses so they can bridge short-term cash flow issues. 

BUT, the Federal Government has been out of control and totally irresponsible in its spending versus revenue planning.  Spending has outstripped our revenues for most of the prior and current century.  Some of the spending was due to wars but much of it was in the creation of one social program after another. 

So, where are we today?  Well, let’s take a look at where we have been the last wo years:

  • 2000–Debt Ceiling: $5.95 Trillion;  57% of GDP
  • 2001–Debt Ceiling: $5.95 Trillion;  56.6% of GDP
  • 2002–Debt Ceiling: $6.4 Trillion;  58.9% of GDP
  • 2003–Debt Ceiling: $7.4 Trillion;  61.4% of GDP
  • 2004–Debt Ceiling: $7.4 Trillion;  62.5% of GDP
  • 2005–Debt Ceiling: $8.2 Trillion;  64.0% of GDP
  • 2006–Debt Ceiling: $8.96 Trillion;  64.2% of GDP
  • 2007–Debt Ceiling: $9.8 Trillion;  65.4% of GDP
  • 2008–Debt Ceiling: $10.6 Trillion;  70% of GDP
  • 2009–Debt Ceiling: $12.4 Trillion;  84.1% of GDP
  • 2010–Debt: $13.5 Trillion;  93.4% of GDP
  • 2011–Debt Ceiling:  $14.4 Trillion:  100%+ of GDP  (Projected)

Do you see the trend?  In the past 3 years we will have increased the debt ceiling by 40% and raised the Debt Ceiling: GDP percentage from 65% to 100% of our GDP.  Obama’s proposed budget for 2012 is to spend over $3.4 Trillion and add over $1.5 Trillion more debt…

The scary part is that the increased government spending since from 2008 to present was supposed to invigorate the economy but the economy remains flat with inflationary pressures on the horizon.  Since we have been in a prolonged recession, 4+years, there is no way for the government to increase tax revenues with further damaging the economy.  The Debt Ceiling is the argument in terms of future budgets.  The Debt Ceiling is like a credit card limit to an individual.  The Government will be asking for an additional $2 Trillion credit card limit in the next few weeks.  If we give it to them, will they earnestly try to reduce spending?  I seriously doubt it.

If we hit the Debt Ceiling what will happen?  What happens when you hit your debt limit?  You stop spending.  Does it feel good, heck no!  Congress and this President need to understand that even though they have printed trillions of dollars in new money that has no value, and they continue to spend money we do not have, this has to stop now.  Not next year, now. 

What happens when we hit our debt limit.  This has happened a few times in recent history and the world did not come to an end.  It does put tremendous pressure on politicians to deal with the spending problem.  It gives the demagogues reason to wax poetic and they have already started.  But, this is one more hurdle we cannot afford to step around.  We need to cut spending so we do not have to raise the Debt Ceiling.  Our GDP is week and growth is almost non-existent.  We cannot afford to have our debt at 100% of our GDP which means we owe the same amount that we create in this country on an annual basis.  If every dime from the US economy was used to pay off the national debt, it would take every single dime to do so.

This is not a tenable position to be in…

RD Pierini

http://news.yahoo.com/s/ap/20110411/ap_on_re_us/us_obama_debt_limit

http://en.wikipedia.org/wiki/United_States_public_debt

http://fpc.state.gov/documents/organization/105193.pdf

http://en.wikipedia.org/wiki/United_States_public_debt

http://assets.opencrs.com/rpts/RL31967_20100128.pdf

http://en.wikipedia.org/wiki/Federal_reserve

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2 thoughts on “What is the Debt Ceiling–Is it Critical?”

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