debt ceiling definition
A new twist to investing and financial planning is averting travesties that the government itself created; first it was the fiscal cliff, now it's the debt ceiling 2013.
The debt ceiling is a part of the way government has to go about doing its business.
However, both sides of Washington have come to use the full faith and credit of the United States of America as a bargaining chip - and the consequences are huge.
But it wasn't always like this.
debt ceiling definition
Debt Ceiling Bill Intensifies Budget Pressure on Congress
The debt-ceiling showdown took center stage on Capitol Hill today (Wednesday) as a crucial vote on a Republican bill gave the Treasury the green light to borrow a fresh stash of cash until May 19.
The Republican-controlled House passed the bill by a 284-144 margin.
It now moves on to the Senate, where it is expected to pass quickly without any changes.
Senate Democrats are expected to back the plan even though they have been hesitant to support any short-term debt ceiling fix, maintaining it creates additional uncertainty for businesses and families.
"I'm very glad that (House Republicans) are going to send us a clean debt-ceiling bill," said Senate Majority Leader Harry Reid, D-NV.
The measure would go from the Senate to U.S. President Barack Obama, who has repeatedly said he will not wrangle over the debt ceiling and will sign the bill when it reaches his desk.
Pleased with the results, the White House added a "but," saying it would have liked a longer- term solution.
While the legislation looked extremely likely to make it to the Oval Office, there is still a chance it could get tangled up in Congress, given a controversial provision in the bill.
The legislation includes a divisive rider aimed at coercing Senate Democrats to ink a long-term budget deal. The "no budget- no pay" provision would withhold pay for members of Congress until a sustainable deal is agreed upon.
"It's not a slam dunk. But the main thing is that the Republicans will cave on the debt ceiling. So we're now just arguing over the details," Greg Valliere, chief political strategist for Potomac Research Group, told CNN Money ahead of the voting.
The Debt Ceiling Isn't What Worries Warren Buffett
Investment guru Warren Buffett isn't sweating the debt ceiling as much as he is some of the country's other issues.
Buffett this weekend said the $16.4 trillion in debt the country has collected is not the number on which everyone should be focused.
"It is not a good thing to have it going up in relation to GDP, that should be stabilized, but the debt itself is not a problem," the CEO of Berkshire Hathaway (NYSE: BRK.A) told CBS' "Sunday Morning" this weekend.
Buffett said the country's debt is a "lower percentage of GDP than it was when we came out of World War II. You've got to think about in relation to GDP."
Here's why debt-to-GDP is what Buffett watches.
Short-Term Debt Ceiling Increase a Strategic Move for GOP
Republicans this week will vote on a short-term debt ceiling increase that gives Washington three more months to agree on budget cuts.
The GOP would approve the short-term increase with the requirement that both the House and Senate pass a budget before the new deadline - or fail to get paid.
The move, according to Republican party strategists speaking to The Washington Post, was designed to give the GOP leverage in the spending cuts fight that will begin in March.
"Republicans have to do a better job of picking our fights," one prominent Republican consultant told The Post. "So, we need more concern about the impact of Obama's reckless spending before we fight with a guy who controls the bully pulpit."
Debates over what to do about the automatic spending cuts, or sequestration, will start before the new April 15 debt ceiling deadline. Republicans want drastic spending cuts, but if Congress can't agree, then deep across-the-board cuts will go into place anyway. Democrats will have to compromise if they want budget cuts other than the sequester.
The GOP compares this to the president's position in the fiscal cliff fight, when Democrats wanted tax hikes on the rich.
"In the fiscal cliff fight, the president had greater leverage because current law was on his side," a House Republican aide told The Post, noting that if nothing was done on the cliff taxes would have gone up on all Americans. By contrast, the aide added, "in the sequestration fight, we have greater leverage because current law is on our side."
What Happens if We Hit the Debt Ceiling?
With possibly less than a month before the United States hits its $16.4 trillion debt ceiling - aka falls off the "debt cliff" - the country is wondering what happens if Washington fails to raise the limit.
Almost everyone agrees that even though the GOP has hinted it will refuse to raise the debt limit to get its way with spending cuts, Congress will agree to another increase. The debt ceiling has been raised 79 times since 1960.
What could happen if it's not raised is a bit of a guessing game, since it's never happened before. But the consensus is we don't want to find out.
As Princeton professor and former vice-chairman of the Federal Reserve Alan Blinder wrote in The Wall Street Journal Monday morning, "Since the federal government has never crashed into the debt ceiling before, nobody knows exactly what will happen if it does. But whatever does happen, it won't be pretty."
Here's a look at what could go down.
If We Hit the Debt Ceiling, Who Gets Paid?
Hitting the U.S. debt ceiling - or, falling off the debt cliff - means the government may not borrow any more money, so some payments would have to stop immediately.
As Blinder outlined, "At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays-which includes everything from Social Security benefits to soldiers' pay to interest on the national debt-will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided."
The Obama administration would be faced with a stark choice: Do we pay the interest on the national debt and avoid technical default?
If that is our choice, then we must also choose who will not get paid.
Will it be soldiers in Afghanistan? Retirees dependent upon their Social Security checks? Taxpayers waiting for tax refunds? Small businesses that have performed work for the U.S. government?
U.S. Debt Ceiling: Government "Borrows" Pension Funds to Avoid Default
The U.S. Treasury, in order to avoid default, has resorted to an eyebrow-raising move: it has borrowed from the federal employee pension fund as the country nears its debt ceiling.
The U.S. government stopped investing in the federal employee pension fund Tuesday "to avoid breaching the statutory debt limit," according to a letter Treasury Secretary Timothy Geithner sent to Congress.
Geithner said that the move will free up some $156 billion in borrowing authority, while policy leaders in Washington wrangle over raising the $16.4 trillion debt limit.
Geithner promised the fund would be "made whole once the debt limit is increased," and maintains that federal employees and retirees would not be affected by the action.
But an IOU from the federal government isn't very settling for those relying on the fund for retirement.
Why You Should Ignore the Coming Debt Ceiling Debate
Under the guise of yet another debt ceiling debate, Republicans and Democrats will spend much of the week demonizing each other on the Washington stage.
But don't be fooled. This so-called debate will be nothing more than a planned-in-advance sideshow to supply each side with 2012 election campaign fodder.
The deal put in place on Aug. 2 essentially guaranteed that the limit on the U.S. national debt would be raised to $16.4 trillion in January. That means any sound and fury that emanates from Washington this week over raising the debt limit will signify nothing.
"It's pro-forma. They already made a deal to raise the debt ceiling last time around," said Shah Gilani, Money Morning Capital Waves Strategist and author of the Wall Street Insights & Indictments newsletter. "The President has to ask for the increase -- which makes it look like he caused it -- and the Republicans get to display anger that "here we are again.' But it's a game they agreed to earlier."
The deal in August intentionally split the debt ceiling increase into three separate requests to set up these faux debates for public consumption.
U.S. President Barack Obama did his part on Thursday by making a formal request for the $1.2 trillion increase in the debt limit.
That was the cue for Republicans in the House of Representatives to draft a "resolution of disapproval" which they will debate and vote on this week. And given that the GOP has a majority in the House, the resolution is guaranteed to pass.
In this play's next scene, the Democratic-controlled Senate rejects the resolution, which allows President Obama's requested debt ceiling increase to take effect by default - just as all sides envisioned back in August.
And even if a few rebellious Democratic Senators vote with their Republican colleagues, President Obama can veto the resolution. With the odds of Congress overriding a veto near zero, the debt ceiling increase is pretty much a lock.
But the show must go on.
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The Debt Ceiling Debate: Will the Democrats' Gambit Lead to a Victory in the 2012 Election?
We talked yesterday (Thursday) about the debt ceiling debate, and how the GOP is making the most of its opportunity to affect the economy in the run up to the 2012 election.
Well, the Democrats are doing the same thing - except whereas the Republicans are looking to make long-term fixes at the expense of short-term growth, Democrats are doing the opposite.
I'll show you what I mean.
As I said in my previous piece on GOP economic strategy, I'm a firm believer in Public Choice Theory.
And in this battle the Democrats would like to see rapid growth between now and November 2012. More than anything, they want to see unemployment come down sharply.
They don't care so much about whether inflation is ticking up a bit, or whether an over-large budget deficit may cause trouble in the future. If they get elected in November 2012, they can try to sort out problems then - particularly if they can recapture the House of Representatives.
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The 2012 Election and the Truth Behind the Debt Ceiling Debate
At this point, there can't be anyone left who truly believes that the debt ceiling debate taking place in Washington is really about what's good for America.
The truth is it's about the 2012 election - and the party that wins the debt ceiling debate will be the party that comes out on top next year.
It's politics - pure and simple.
Republicans and Democrats have their own respective agendas heading into the 2012 election. And with 16 months to go, there's just enough time for actions taken now to work their way through the system and swing the economy in one direction or the other.
Now, I'm not a believer in conspiracy theories, but I am a firm believer in Public Choice Theory. That means I believe we can make clear statements about what economic conditions each party would like to see 16 months from now - considering their own selfish political points of view.
The Democrats would like to see rapid growth, with unemployment coming down sharply. They don't care so much about whether inflation is ticking up a bit, or whether an over-large budget deficit may cause trouble in the future. If they get elected in November 2012 they figure they will sort out any problems after the fact - particularly if they can recapture the House.
Conversely, the Republicans would like growth to be sluggish, with unemployment stubbornly high. They also would like to make the painful decisions that bring long-term growth now, so that they can benefit from the growth and not suffer the political cost of the pain if they capture the Presidency and ideally both Houses of Congress in November 2012.
Both parties, of course, have strong beliefs about what policies work better, about what policies are better for the interest groups that support them, and about what policies are best suited to their ideology. But at this stage of the electoral cycle, they're pragmatists.
Here's how the election cycle breaks down:
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The Ugly Debt Ceiling Debate
The United States is expected to reach its $14.29 trillion debt limit no later than May 16. House Speaker Rep. John A. Boehner, R-OH, promises to extract deep spending cuts as a prerequisite to any deal with Democrats on raising the debt ceiling — but the GOP refuses to just roll over on the issue. […]