united states debt ceiling

Why the U.S. Debt Ceiling Debate is a Bigger Deal than the Fiscal Cliff

With the fiscal cliff deal behind us at last, the next big battle in Washington will focus on the U.S. debt ceiling, and the stakes are high.

The United States officially hit the $16.394 trillion U.S. debt ceiling Dec. 31. The debt now stands at about 73% of U.S. gross domestic product and will continue to rise over the next decade without major spending reforms.

Now the U.S. Treasury Department has decided to employ what Treasury Secretary Timothy F. Geithner calls "extraordinary measures" in the next two months to avoid actually defaulting on debt. Those measures include temporarily stopping the reinvestment of federal employees' retirement account contributions into short-term government bonds as well as other steps to discontinue debt issuance.

The new deadline for resolving the debt ceiling issue looms at the end of February, giving Congress little time to regroup after partly resolving the fiscal cliff.

"Do not forget that the fiscal cliff is only one of three upcoming problems in our ongoing fiscal madness," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "There's still the debt ceiling, sequestration and the complete lack of a budget to contend with. In other words, it's on to the next crisis now."



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U.S. Debt Ceiling: Forget Fiscal Cliff with the Real Issue Still Ahead

The nation's attention has been captured by the bitter and so far unfruitful fiscal cliff negotiations between U.S. House Speaker John Boehner, R-OH, and U.S. President Barack Obama.

But this is a sideshow.

The real issue is Boehner's attempt to tie the U.S. debt ceiling to fiscal cliff deal making.

The United States is getting close to its borrowing limit. The U.S. debt ceiling must be increased if the United States government is to be able to borrow enough money to pay its bills.

As of Monday, Dec. 17, the U.S. government was about $63 billion shy of its borrowing limit, currently set at $16.394 trillion under the 2011 agreement that led to today's fiscal cliff negotiations. The government is likely to hit that limit by the end of this month.

Boehner has offered to extend the debt limit for a year in order to make a deal to avoid the fiscal cliff. But he wanted something huge in return.

"Any debt limit increase would require cuts and reforms of a greater amount," said Boehner spokesman Brendan Buck.

President Obama counter-offered asking for a deal that would raise the debt limit high enough so it would not be revisited until after the 2014 midterm elections. The GOP has yet to deliver a response.



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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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