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The Facts About the Debt Ceiling
#1
Understanding the Debt Ceiling, and the subject of Default, is a Classic Case of why it is not advisable to take the word of the Jackass Leadership. Put simply, they can always be counted upon to lie to the public.

We have all heard the braying and Hee Hawing about how the system will fall apart, the country will dissolve, and all our daughters will be raped and pillaged, if we do not agree to 'officially' permit Obama to spend more money, which we don't have any longer.

Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, and another one of those crazy/evil/unhinged Austrians, has been carefully, and logically going about dismantling the emotion laden predictions of "Doom and Gloom" coming out of the mouths of the Obama Administration, and other Jackasses tasked with scaring the public into allowing them to have their way.

Here is what she has to say:

Veronique de Rugy on the Facts About the Debt Ceiling
Editor’s Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

Quote:Myth 1: If a deal is not reached by August 2, the U.S. will default on its debt.

Fact 1: The Treasury Department can prioritize payments in order to avoid a default.

The Treasury Department is due to pay off $30 billion in maturing short-term debt. But we also know that the Treasury has the ability to prioritize its payments and pay that particular $30 billion out of the $172 billion it collects in tax revenue. As the Bipartisan Policy Center has calculated, after paying $30 billion in interest payments in August, Treasury could, if it ceased all other functions (see page 13 of this document), also pay for Social Security, Medicare, unemployment benefits, and payments to defense contractors. Technically speaking, there is no need to default in the absence of a debt ceiling agreement.

[Image: debtceiling1.jpg]

This is not an ideal solution and it entails some significant risks (mainly timing difficulties), but it could be done if necessary.

In addition, the Treasury could sell some of its assets in order to pay the bills. That’s an expensive option at this point, since it would probably mean selling them at a low price, but these are not normal times and a fire sale beats a default.

Myth 2: If the debt ceiling isn’t raised the government won't be able to pay Social Security benefits.

Fact 2: There are approximately $2.6 trillion dollars in the Social Security Trust Fund. Those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit. Treasury Secretary Timothy Geithner could convert that interagency debt into publicly-held debt, preventing not only a technical default but also preventing any delay in government payments.

[Image: debtceiling2.jpg]

President Barack Obama has suggested that if the Treasury prioritized payments in order to prevent default on the debt, it might do so on the backs of seniors by not sending out their Social Security checks. This is a particularly troubling rhetorical move by the White House. As the president and his advisers know, there are ways for the government to pay these benefits—messy ways, yes, but still viable—in the absence of a debt-ceiling agreement. That’s what the president should be saying rather than trying to scare seniors.

According to a Bipartisan Policy Center report, incoming revenue on August 3 will amount to $12 billion. At the same time, the government is scheduled to spend some $32 billion—most of it in the form of Social Security checks. How do we make up the difference?

First, remember how Social Security works. Starting now, the difference between payroll-tax revenue and Social Security benefits is made up by redeeming the IOUs in the Social Security Trust Fund. In order to pay back this IOU, Treasury has to borrow the money, which increases the debt held by the public by the same amount. In other words, if Treasury were to redeem the needed Social Security bonds and issue new marketable Treasury bonds to make good on them, it would be a one-for-one swap.

There is a potential glitch, however, having to do with whether Treasury has the authority to use payroll tax money to pay benefits rather than to “invest.” According to Washington Post “Fact Checker” Glenn Kessler, the Treasury has done it before:

Quote:There is a technical wrinkle involving the fact that payroll taxes that are collected are supposed to be immediately turned into Treasury securities, but there could be ways around that, such as putting the monies in a noninterest bearing account, as during the 1985 debt crisis. “Although some of the Secretary’s actions appear in retrospect to have been in violation of the requirements of the Social Security Act, we cannot say that the Secretary acted unreasonably given the extraordinary situation in which he was operating,” the General Accounting Office later concluded....

Still, during the 1996 debt limit crisis, Treasury Secretary Robert Rubin announced that Treasury did not have sufficient funds to pay Social Security benefits. Congress rushed to pass a special law that said the Social Security benefits did not count against the debt limit. Was this designed to pressure the Republican-led Congress, or had even a shrewd operator like Rubin run out of options? However, Congress later that year passed a law, 121-104, that codified Treasury’s authority to use Social Security trust funds to pay benefits and administration expenses in the event a debt ceiling is reached, which could give the administration the authority they need in the current crisis.

The Congressional Research Service has also explored this question in a series of reports this year. The answer is unfortunately inconclusive and buried in a footnote: “Under normal procedures Treasury pays Social Security benefits from the General Fund and offsets this by redeeming an equivalent amount of the trust funds’ holdings of government debt. In order to pay Social Security benefits, and depending on the government’s cash position at the time, Treasury may need to issue new public debt to raise the cash needed to pay benefits. Treasury may be unable to issue new public debt, however, because of the debt limit. Social Security benefit payments may be delayed or jeopardized if the Treasury does not have enough cash on hand to pay benefits.”

Myth 3: The Treasury cannot use the Social Security Trust Fund to delay a default past August 2.

Fact 3: While the Treasury cannot use money from the Social Security Trust Fund, it can “disinvest” from other trust funds to pay for benefits.

Treasury can “disinvest” from some of its trust funds. Here’s how it works according to the legislative director of the National Active and Retired Federal Employees.

Quote:Each day, the U.S. Treasury takes in several billion dollars for federal trust funds. For Social Security, these dollars come in the form of employer and employee payroll taxes. Federal employee and Postal Service contributions to the CSRDF [Civil Service Retirement and Disability Fund] also inject cash into the Treasury. Usually, this cash is immediately invested in nonmarketable government securities—to remain available to finance future benefits. But if a debt limit breach appears imminent, the Treasury Department could “underinvest” this revenue as it arrives. The trust funds would be given a temporary IOU that does not count against the debt ceiling, and the withholdings would be used to pay off the government’s cash obligations until an increase in the debt ceiling could be settled.

The Treasury Department could also make cash available from the trust fund by “disinvesting” some of the money used to buy government bonds. Under this approach, bonds held on behalf of trust funds would be converted to cash earlier than normally needed. Like the “underinvestment” option, cash from this transaction would be used to pay federal obligations on a temporary basis.

The disinvesting approach is a temporary accounting device that would help maintain the Treasury’s cash flow.

According to the Government Accountability Office, the use of “disinvestment” to pay for benefits has been used during a previous debt-ceiling crisis:

Quote:In the past, Treasury has taken a number of extraordinary actions such as temporarily disinvesting securities held as part of federal employees’ retirement plans to meet the government’s obligations as they came due without exceeding the debt limit, until the debt limit was raised.

[Image: debtceiling3.jpg]

In fact, it happened during the last big debt-ceiling crisis in 1995-1996. According to the GAO, Treasury managed to remain technically under the debt ceiling and incurred about $138.9 billion in additional debt that normally would have been subject to the ceiling by disinvesting $46 billion in Civil Service fund securities in November 1995 and February 1996. The Treasury also suspended the investment of $14 billion in fund receipts in December 1995 and exchanged about $8.6 billion in Civil Service fund securities for Federal Financing Bank securities.

These actions, of course, are nothing more than short-term budget gimmicks. But they would allow the U.S. to avoid defaulting on the debt. Once these options are exhausted, however, there will be nothing left to do but raise the debt ceiling or dramatically cut government spending.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#2
The issue isn't whether we actually default, so much as what the ratings agencies think. Although I'm not sure about all of these specific proposals, the agencies have a very expansive definition of default.
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#3
Are you saying 'perception' trumps 'reality'?

And are you saying that just because the Jackass leadership keeps braying about this 'perception' thing, we really should accept their lies and go from there?

Oh, and I notice you are not defending them when I accuse their leaders of playing off the fears of the gullible.
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#4
(07-21-2011, 02:56 PM)John L Wrote: Are you saying 'perception' trumps 'reality'?
Welcome to finance. That's how contagion works. Why else would a potential Greek default also make investors skiddish about Spanish and Italian bonds?
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#5
john's article Wrote:Fact 2: There are approximately $2.6 trillion dollars in the Social Security Trust Fund. Those assets can be used to pay benefits. Furthermore, there is already trillions of dollars of interagency debt that counts toward the $14.29 trillion debt limit. Treasury Secretary Timothy Geithner could convert that interagency debt into publicly-held debt, preventing not only a technical default but also preventing any delay in government payments.

But there is NO SS trust fund. That money has been spent, not put into assets that can be sold. Correct me (with appropriate links) if I am wrong. If there is a trust fund, then BHO is a bald faced liar (not impossible, given the lefts proclivity for inventing crises), saying SS payments might not go out, subject to his judgment. However, the gummint owns huge real assets of all sorts that could be sold.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#6
[Image: who%20owns%20debt.png]link
(I will comment later as soon as I find time to do so)
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#7
(07-21-2011, 05:41 PM)jt Wrote: But there is NO SS trust fund. That money has been spent, not put into assets that can be sold. Correct me (with appropriate links) if I am wrong. If there is a trust fund, then BHO is a bald faced liar (not impossible, given the lefts proclivity for inventing crises), saying SS payments might not go out, subject to his judgment. However, the gummint owns huge real assets of all sorts that could be sold.

JT, obviously she was using the term 'trust fund' in a slightly different context. You are applying it in the 'de facto' mode, and she the 'de jure' one.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#8
spare the crap, you tea-baggers are an utopian anti-government cult, so don't try to attribute any substance. even the proven fruitcake ronald reagan stated in 1983 when he raised the debt ceiling,

"The full consequences of a default - or even the serious prospect
of default -- by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar."


i bet reagan wouldn't even be dumb enough for the republican nomination nowadays.
"You know, Paul, Reagan proved that deficits don't matter." Dick Cheney
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#9
It's T. Geithner who first said a long time ago that the Treasury has more than one way to avoid default has the debt ceiling not to be raised.

He never elaborated.

They can prioritize payments, in other word suspend them until balance is reached again.
That will be a shock for certain poeple but also the discovery of what "debt ceiling reached" means.

So far poeple think it's...
Quote:a bill to allow Obama to spend more.
Soon they will see it's a bill to allow them or at least one of their relative to recieve a payment from the governement.

You will suddenly find out that it's not Obama who demagogicaly spend this money, it' the 9% of unemployed and the same amount in lower income tax caused by a twice higher unemployement rate. It's also the aging of the population, the war efforts and industrial subsidies.
Obama has spent more money on material spending (non tax cut) only in the first year after the subprime crisis.

I think it'a good thing to force the administration to spend less, and this time is a good oportunity to do so. But the GOP should also take part in the effort and allow tax-for-the-rich rebates to expire. And stop blaming evry single dollar spent by a governement agency solely on Obama.
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#10
Quote:Soon they will see it's a bill to allow them or at least one of their relative to recieve a payment from the governement.

And thus the stupidity of spending tons of money you don't have will go on. Yes, it allows some people to get money from the government. But only because it allows the government to keep spending money it doesn't have.

Why is this so hard to understand?

Quote:But the GOP should also take part in the effort and allow tax-for-the-rich rebates to expire.

So how much of the rich peoples taxes are you willing to pay? They will almost certainly make up the increased tax difference by charging you more for what they sell you.

Quote:And stop blaming evry single dollar spent by a governement agency solely on Obama.

Of course, most of the government agencies are in the legislative branch, which puts them under Obama. That being said, the congress also takes some of the blame, since they write the budget (unless you're the Democrat controlled congress who didn't actually write a budget until after the Republicans took over the house).
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#11
Neon swans
Quote:You've heard of black swans—events that are unthinkably rare, immensely important, and as unpredictable in advance as they are inevitable in hindsight. Now, with no one ruling out a default or downgrade of U.S. Treasury debt, investors face a new kind of threat: what we will call the neon swan, an event that is unthinkably rare, immensely important and blindingly obvious.

...Theodore Aronson, a partner at Aronson Johnson Ortiz in Philadelphia, oversees $21 billion in stock investments for 90 institutional clients. In roughly 75 conference calls with clients over the past few weeks, says Mr. Aronson, no one has asked whether a different investing approach is needed in light of the risk that a U.S. debt crisis might make the markets go haywire.

"I find it amazing," he says, "that we have not gotten a single question or comment about it."

Then again, Mr. Aronson adds, his firm hasn't done anything to protect against the risk of a crisis in the Treasury market. "We've thought about it, but we don't know what to do," he says. "As best we can figure it, there isn't anything we can do."

Some investors are worried enough to ask questions, but not many have taken any action yet, says Paul LaRock, a principal at Treasury Strategies, a Chicago-based firm that helps large corporations manage their cash. "Companies are pulling out their investment policies and rereading them," he says. One major firm on the East Coast, Mr. LaRock says, asked this week whether its investment-policy statement, which places "no limit" on its holdings of U.S. Treasurys in the company's cash balances, needs to be amended to keep the company's coffers secure.

Mr. LaRock says the client is still mulling that question. And, even with disaster seeming inevitable, many investors may be paralyzed by uncertainty. "U.S. government securities have long been the yardstick for measuring the risk of most other investments," he says. "One of the most disturbing things that we all have to get our minds around should the unthinkable happen," he adds, "is that the reference point for pricing securities around the globe could be lost. No one can predict what would happen worldwide."
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#12
[Image: mrz071411dAPR20110714124522.jpg]
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#13
Ok, that's cute...
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#14
Obama's dicretionary or populist spendings had minimal impact on the debt ceiling issue. Most of Obama's spending has been structural spending to successfuly rescue the economy.
Obama didn't profit from the money he had spent.
HIs entire presidency has been lost fighting off the financial crisis. By contrast W enjoyed his war on Iraq, Clinton a triumph in Kosovo and Reagan the Star War dream. Obama is just allowed to bring soldiers back home and see the space exploration come to an end.

Now raise the debt ceiling and debase your currency because there is realy nothing else to do. Who will agree to cut by half all governement handouts from the military to medicaid? Impossible. You don't want it.
Nobody in the US wants it, no more than they want it in Greece. Poeple don't want a balanced budget as soon as they get less money for themselves.
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#15
Quote:Obama's dicretionary or populist spendings had minimal impact on the debt ceiling issue. Most of Obama's spending has been structural spending to successfuly rescue the economy.
Obama didn't profit from the money he had spent.
HIs entire presidency has been lost fighting off the financial crisis. By contrast W enjoyed his war on Iraq, Clinton a triumph in Kosovo and Reagan the Star War dream. Obama is just allowed to bring soldiers back home and see the space exploration come to an end.

Well, yes. He's a moron. And a failure, since the economy he's trying to rescue is worse now than when he took over.
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#16
(07-25-2011, 11:44 AM)Huh...What? Wrote:
Quote:Obama's dicretionary or populist spendings had minimal impact on the debt ceiling issue. Most of Obama's spending has been structural spending to successfuly rescue the economy.
Obama didn't profit from the money he had spent.
HIs entire presidency has been lost fighting off the financial crisis. By contrast W enjoyed his war on Iraq, Clinton a triumph in Kosovo and Reagan the Star War dream. Obama is just allowed to bring soldiers back home and see the space exploration come to an end.

Well, yes. He's a moron. And a failure, since the economy he's trying to rescue is worse now than when he took over.

He's neither stupid, nor a moron. He knows exactly what he is doing overall. His problem is that He is an Ignoranus, albeit a slick one.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#17
The Debt Ceiling Is Complete Bullshite!
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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#18
Quote:He's neither stupid, nor a moron. He knows exactly what he is doing overall.

Yes. He is. He thinks he knows what he is doing. He doesn't.
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#19
(07-25-2011, 03:27 PM)Huh...What? Wrote:
Quote:He's neither stupid, nor a moron. He knows exactly what he is doing overall.

Yes. He is. He thinks he knows what he is doing. He doesn't.

You are mistaking intelligence with wisdom. There is a difference.

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"Falsehood flies, and truth comes limping after it" - Jonathan Swift, 1710
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#20
Intelligent people generally develop wisdom far quicker than stupid people, who never do. I put him in the "never will, therefore stupid" category.
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