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.

Washington's Dangerous Debt Ceiling Game

Republicans seeking to preserve the Bush tax cuts for the top 2% of U.S. taxpayers are in a very poor negotiating position regarding the fiscal cliff.

If no agreement is reached with the Obama administration, all the Bush tax cuts will expire on Jan. 1, 2013, and taxes will go up for everyone.

In that case, Democrats would immediately introduce a bill to restore tax cuts for everyone except the top 2%. It would be political suicide for Republicans to vote against the restoration of
middle-class tax cuts so Democrats would get everything they want and the Republicans would have to acquiesce.

By tying the debt ceiling to the fiscal cliff talks, Republicans can maximize their leverage over the president and his fellow Democrats. Threatening to push the United States into default is really the only way Republicans can get the spending cuts and tax concessions they say they want.

For his part, President Obama has said he will not bargain with Republicans over the debt ceiling as a part of the fiscal cliff negotiations.

According to Slate, the Obama administration is seriously trying to get Congress to adopt a plan initially floated by Senate Minority Leader Mitch McConnell, R-KY.

Now, if Treasury needs to borrow more money, Congress must raise the debt ceiling. Under McConnell's plan, Treasury would ask to borrow more money, Congress would pass a resolution disapproving the increase, if it disapproves, and the president would veto the resolution, allowing the debt ceiling to rise.

"What's not been adequately appreciated by the press is the extent to which the Obama administration is deadly serious that this arrangement or one like it must be in any fiscal cliff deal," Slate wrote. "That's not a bargaining posture... If resolving the fiscal cliff doesn't also resolve the debt ceiling, then nothing is accomplished..."

George Washington University Law School Professor Michael Abramowicz, cited in The National Review, wrote, "The Republicans could turn the tables on this issue by proposing or passing in the House a bill that would not eliminate the debt limit, but would change the consequences of hitting the debt limit."

"One approach would be to provide that the Treasury can continue to borrow to the extent necessary to make payments on the existing debt," continued Abramowicz. "That would put off the table the possibility of a default. Another approach might also protect some additional categories of spending, perhaps Social Security and funds needed to keep the government running."

How to Delay Hitting the U.S. Debt Ceiling

With an agreement far from definite, the U.S. Treasury Department, which is responsible for paying the government's bills, is beginning to take some extraordinary measures that will buy the government a bit more time-until late February or early March-before the debt ceiling is actually breached.

Measures the government could take to delay hitting the debt ceiling include the following:

  • Suspend sales of state and local government securities (slugs)
  • Suspend and/or redeem investment in the Civil Service Retirement and Disability Fund
  • Suspend re-investments in the Government Securities Investment Fund, a federal employee pension fund
  • Dip into the U.S. dollar balance of the Exchange Stabilization Fund
  • Issue more cash-management bills. These usually mature in days rather than the minimum four weeks for Treasury Bills
  • Suspend the sales of U.S. savings bonds
  • Swap Federal Financing Bank debt. The Federal Financing Bank is not subject to the debt ceiling and can issue up to $15 billion in debt.

But, at the end of the day, the debt ceiling must be raised to enable Treasury to pay the debt incurred by Congress.

Back in 2011, Congress refused to raise the debt ceiling without massive spending cuts while the Obama administration refused to make spending cuts as large as the Republican House leadership wanted. The willingness of Congress and the administration to let their disagreement over spending push the United States to the brink of default resulted in the loss of America's AAA credit rating.

It also created the fiscal cliff that we now face.

There are a number of interesting alternatives to hitting the debt ceiling being discussed if politics pushes the United States to the brink of default again.

In 2011, some analysts suggested the president could invoke Section 4 of the 14th Amendment of the Constitution, which gives the president an independent obligation to not allow the validity of U.S debt to be called into question. Some have interpreted this to mean that the president can unilaterally raise the U.S. debt ceiling.

The president has already rejected this alternative because it might violate Article I, Section 8 of the Constitution giving Congress the authority to borrow on the credit of the United States.

What is most likely to happen is that the president will order a partial government shutdown that will allow the interest on government debt to be paid until the U.S. debt ceiling is raised by Congress.

The $1 Trillion Coin

Another alternative that has been talked about is a quirk in the law that allows the Treasury Department to issue platinum coins in any denomination that it wishes.

Theoretically, Treasury could issue a $1 trillion platinum coin, which the Treasury secretary could put into his pocket and then walk over to the Federal Reserve Bank to make a deposit to fund the government for however long $1 trillion lasts.

While there is a certain amount of novelty appeal to the $1 trillion coin idea, it is a silly solution to a very real problem. As bad as the fiscal cliff may be, if no agreement is reached, the changes take place over time and can be reversed before much damage is done to the economy.

A default by the U.S. government would take effect immediately, would be far more devastating for the global economy and much more difficult to repair. The United States can't afford to have its credit rating cut again, so the U.S. debt ceiling needs to be raised.

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