U.S. Debt Ceiling
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Debt Ceiling Bill Nothing More Than a Band-Aid
We have a short-term debt ceiling fix - with emphasis on short term.
U.S. President Barack Obama Monday night signed into law a bill suspending the debt ceiling, a move that allows the government to avoid default-at least until August when Congress will again have to act to prevent such a scenario.
The new law lifts the current debt limit through May 18, allowing the federal government to continuing borrowing to pay its bills until then.
But Congress does have more leeway than the May 18 deadline. The Treasury can use "extraordinary measures" to access funds, which will give it until August before the risk of default comes up again.
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The Debt Ceiling 2013: How We Got Here, What Could Happen
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.
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Are Steep U.S. Spending Cuts Inevitable?
U.S. Rep. Paul Ryan (R-WI), the chairman of the House Budget Committee, is adamant Republicans will resist any further tax increases - a staunch GOP stance that makes steep spending cuts almost certain.
Ryan, the 2012 vice president nominee, told NBC's "Meet the Press" Sunday that the $1.2 trillion worth of automatic spending cuts will take effect because "Democrats have opposed our efforts to replace those cuts with others."
In the NBC interview, Ryan took aim at President Barack Obama."I don't think that the president actually thinks we have a fiscal crisis," Ryan said. "He's been reportedly saying to our leaders that we don't have a spending problem, we have a healthcare problem. That leads me to conclude that he just thinks we ought to have more government-run healthcare and rationing."
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Will the Debt Ceiling be Good for Gold and Silver?
Investors preparing for Washington's budget battle need to know: Will the debt ceiling be good for gold and silver?
Thanks to recent legislation passed in the U.S. House of Representatives Wednesday, the debt ceiling could be extended until May 19. The bill now moves onto the Senate where it is expected to get the green light, then should be signed quickly by U.S. President Barack Obama.
That gives investors time to prepare for what any budget decision - or indecision - out of Washington will do for their investments.
While the bill leaves the government without a long-term budget strategy, investors ought to have a plan in place.
One thing they can plan on is higher silver and gold, and here's why.
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Debt Ceiling Bill Includes Controversial "No Pay" Plan
Republicans will vote tomorrow (Wednesday) on a debt ceiling bill that will give Congress nearly four months to make some major budget decisions - or risk losing out on pay.
The bill aims "to ensure complete and timely payment of the obligations of the United States Government until May 19, 2013," according to a release Monday from the House Rules Committee. Exactly how much the $16.4 trillion debt ceiling will be lifted hasn't been discussed.
In a significant shift in GOP strategy, the legislation does not include specific spending cuts, like previously when Republicans have requested dollar-for-dollar cuts to match the debt ceiling increase.
What it could include is a requirement for both the House and Senate to pass a budget by as early as April 15 or have Congress members' salaries held in escrow until one is passed - what the GOP has coined a "no budget, no pay" rule.
"[I]f the Senate of House fails to pass a budget in that time, members of Congress will not be paid by the American people for failing to do their job. No budget, no pay," House Majority Leader Eric Cantor, R-VA, said last week.
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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."
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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?
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The Trillion Dollar Trick
The birth, and the apparent death, of the trillion dollar platinum coin idea may one day be recalled as a mere footnote in the current debt crisis drama. The ultimate rejection of the idea (which was to use a loophole in commemorative coinage law to mint a platinum coin of any denomination) by both the President and the Federal Reserve seems to offer some relief that our economic policy is not being run by out-of-touch academics and irresponsible congressmen. In reality, our government has been creating more than one trillion dollars out of thin air every year for the past five. The only difference is that the blatant dishonesty of a trillion-dollar platinum coin is so easy to understand that the public simply couldn't be expected to swallow it. The American people are more than willing to be fooled, but they won't tolerate so simple a ruse.
People have a long and intimate history with coins. Some of us collected them as kids, and we all touch and see them every day. Unlike currency bills, we know intuitively that a coin's value is supposed to come from its metal content. That's why quarters are bigger than dimes.As a result, most people have viscerally rejected the platinum coin idea. To assign an arbitrary, sky high, valuation to a small piece of metal strikes most people as a deceitful, desperate act. They are right.
However, the same people have no problem with images of thousands of crisp paper notes flying off the printing presses. The acceptance is not impacted by how many zeroes the bills contain. People simply believe that paper money derives value from the numbers, not the paper. This was not always so. Paper money originally entered the public awareness as promissory notes to pay different amounts of gold. Once people got used to the paper, few really cared when the gold backing was finally removed. As a result, the public would likely have been much more accepting of the Fed printing a trillion dollar bill than the government minting a trillion dollar coin. But there was no legal pathway for the Fed to simply give that money to the government.
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The government, not the Fed, mints coins, so they did not have to rely on the Fed to create value out of thin air. That is why the platinum coin idea was so seductive, if ultimately unsellable.
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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.
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U.S. Debt Ceiling Deadline Prompts This Stern Warning from Obama
The U.S. debt ceiling deadline lies just a few weeks away, raising the prospect of the nation defaulting on loans, seeing its credit rating downgraded and being plunged into a recession.
And there's no sign U.S. President Barack Obama or congressional Republicans are ready to budge on their positions on what to do about the debt ceiling.
President Obama once again made his case for raising the debt ceiling during a White House press conference today (Monday) and faulted Republicans for what he portrayed as a misguided position.
"They will not collect a ransom in exchange for not crashing the American economy," President Obama said. "The full faith and credit of the United States of America is not a bargaining chip."
If the GOP lawmakers refuse to increase the U.S. debt ceiling - they're holding out for dollar-for-dollar spending cuts - the president said markets could "go haywire," government payments including Social Security and military personnel checks would be delayed and the economy would slide into recession.
"It would be a self-inflicted wound on the economy," President Obama said. "It would slow down our growth and tip us into recession. To even entertain the idea of this happening is irresponsible. It's absurd."
