StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

The Very Real Threat of a U.S. Debt Default

02 Jan 2011
Posted by Bruce Bartlett
This morning, CEA chairman Austan Goolsbee warned Republicans against playing games with the nation’s credit rating by refusing to raise the debt limit and creating a technical default. I have been warning people about this problem for more than a year because I know there is a widespread belief among the nuttier right-wingers that a debt default is just what the country needs to force massive spending cuts into effect. Many stupidly believe that the budget would be balanced overnight because the government couldn’t spend any more than the available cash flow from taxes would permit.
Since I first started writing about this danger, some of these nutty right-wingers have been elected to Congress under the Tea Party banner. Since many have never served in elected office before and know virtually nothing about economics or finance, I don’t think they realize that they are playing with fire when they even hint at the possibility of a debt default. They are like children playing with matches.
What I haven’t figured out how to properly convey is that a default triggered by a failure to raise the debt ceiling is of a completely different nature than the sort of default that Ken Rogoff and Carmen Reinhart wrote about in their book. All of those cases were market-driven, where investors refused to buy or refinance a nation’s debt because of fiscal profligacy, irresponsible monetary policies etc. A U.S. default, by contrast, would be 100% self-inflicted based on loss of the Treasury’s legal authority to issue bonds, not because of a lack of market demand for those bonds. The historically low level of real and nominal interest rates on Treasury securities is proof that there is still strong demand for Treasury securities.
I have spent considerable time trying to figure out what exactly would happen in the event that, at some point, the Treasury literally had no cash to pay interest on the debt, redeem maturing securities, pay Social Security benefits and so on. Some people believe that the Treasury has an almost unlimited ability to fudge the problem indefinitely. But I know that there are analysts at the GAO who are very concerned about hitting a hard limit on the Treasury’s legal authority not long after the debt ceiling is breached. The law is very unclear and has never been tested in court.
As far as I am aware, no other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue. They correctly recognize that the deficit and the debt are simply residuals resulting from the government’s tax and spending policies. It makes no sense to treat the debt as if it is an independent variable.
Some argue that the debt limit has the virtue of focusing the attention of policymakers on the debt. But Congress already has a budget process designed to do that on an annual basis. Having a separate debate on the debt limit is at best superfluous. But it’s also dangerous because it allows members of Congress to try and compensate for being fiscally irresponsible – voting for new entitlement programs such as Medicare Part D or massive tax cuts that are not offset with spending cuts – by casting a vote against the debt limit.
I reprint below a column I wrote for the Fiscal Times last year that goes into more detail on the debt limit and the very real prospects for default. The important thing for readers to realize is that the prospect of default is not theoretical; it is real. The Tea Party people really are crazy enough to do it and may have the votes to make it happen. It simply cannot be assumed that there are enough adults left in the Republican Party to take responsibility and do what is necessary on this issue. It’s best to assume the worst, in my opinion.
Debt Default: It Can Happen Here
The recent financial crisis in Greece has led to a lot of discussion about whether the United States might one day have a public debt so large that default becomes a real possibility. While the sort of problem Greece is experiencing is impossible here, we have another problem that, to my knowledge, no other nation on Earth has: a legal limit on government debt that Congress must raise periodically. This peculiarity of our fiscal system could indeed lead to a default on the debt, with repercussions that advocates of default — yes, they exist — have absolutely no clue about.
The main reason the U.S. cannot suffer the sort of debt problems of Greece and other eurozone countries is that all our debt is denominated in dollars, of which we essentially have an unlimited supply. Because its monetary policy is controlled by the European Central Bank, Greece can’t just print euros the way we can print dollars. And the Federal Reserve will always ensure the success of a Treasury bond auction. De facto monetization of the debt could be inflationary, but default resulting from a lack of demand for Treasury bonds is not really possible.
This does not mean that default is impossible, however, because there is always a danger that Congress will not raise the debt ceiling in a timely manner, meaning that the Treasury may not have sufficient cash to make interest payments or redeem maturing securities. If that happens, there would be a technical default.
As of right now, outstanding debt subject to limit is a little over $13 trillion and the debt limit is $14.3 trillion. At the rate the Treasury is borrowing, it can continue for about 10 months before the debt limit must be raised again. It has been difficult enough, politically, to raise the debt limit when Democrats control both houses of Congress. But next year there is almost certain to be a very substantial increase in the number of Republicans in both the House and Senate, with Republican control of the House being well within the realm of possibility.
The party opposite the White House always demagogues increases in the debt limit to score cheap political points. Economist Donald Marron calls the vote on raising the debt limit a tax on the party in power. Barack Obama knows this very well. As a U.S. senator he voted against a debt limit increase in 2006, saying that the necessity of raising the limit was “a sign of leadership failure.”
To be sure, the debt limit has always been raised in time to prevent a default, although Treasury sometimes had to push the limits of the law to move money around to pay the government’s bills. However, I believe the game has changed because Republicans have become extremely bold in using the filibuster to make it extraordinarily difficult to pass any major legislation without at least 60 votes in the Senate.
Furthermore, a growing number of conservatives have suggested that default on the debt wouldn’t be such a bad thing. It is often said that default would lead to an instantaneous balanced budget because no one would lend to the U.S. government ever again. Therefore, spending would have to be cut to the level of current revenues.
Writing in Forbes last month, the Cato Institute’s John Tamny was enthusiastic about the prospects of default. Said Tamny, “It’s time we learn to love the idea of a U.S. default . . . For Americans to worry about a debt default is like the parent of a heroin addict fearing that his dealers will cease feeding the addiction.”
While acknowledging there might be some pain from default, he dismissed it as trivial compared to the enormous blessing of a massive reduction in federal spending.
Tamny is not an isolated crackpot; reputable conservative economists have been writing sympathetically about the idea of default for decades. These include Nobel Prize-winning economist James M. Buchanan, whose 1987 essay, “The Ethics of Debt Default,” defended the morality of default on the grounds that deficits weren’t financing public capital but current consumption, with the bills being passed on to future generations.
Other prominent conservatives who have been favorable, even enthusiastic, about debt default include Murray RothbardDan PillaJeffrey Rogers Hummel, and Christopher Whalen. In 1995, then House speaker Newt Gingrich publicly warned the Public Securities Association that he was prepared to default on the debt unless Bill Clinton acceded to Republican demands for budget cuts. “I don’t care what the price is,” Gingrich said.
Consequently, it is becoming increasingly common for the idea of default to be discussed as a realistic possibility even by responsible analysts. Last year, The Economist’s Greg Ip wrote an article in the Washington Post saying that financial markets were placing the risk of default at 6 percent over the next 10 years. “Default is unlikely,” he said. “But it is no longer unthinkable.”
My purpose today is not to make the case against default or explain all of its ramifications — that would require a separate column. Rather, my purpose is simply to alert readers to the consequences of increased Republican membership in the next Congress, a Democratic administration, the need for 60 votes in the Senate on major bills, and a debt limit that will run out early next year. I believe we could be in for the biggest debt crisis we have seen since Alexander Hamilton was Treasury secretary.
One way of forestalling such a crisis would be for Congress to require that bills breaching the budget resolution’s revenue floor or spending caps — those designated as “emergency” legislation — would have to include an increase in the debt limit equal to the increase in the deficit. This won’t eliminate the need to raise the debt limit eventually, but it would at least put members of Congress on record as accepting the consequences of deficit spending, rather than trying to have it both ways — voting for deficits but then scoring political points by voting against an increase in the debt limit.

One can only hope that the

One can only hope that the Republican's corporate masters are still in control. A party devoted to tax and other benefits for the rich should realize the effects of a default, or even the serious threat of a default, on financial assets, which are almost all held by the rich.

On the other hand, they may push the envelope, hoping our "give the hostage takers what they want"-in-chief will fold, leading to the mess you describe.

Debt Ceiling

The Debt Ceiling is the result of statutory law passed by Congress.

The Constitution, in Article I Section 8, states:

"The Congress shall have Power

To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States;"

It's going to be awfully funny to watch the Tea Party types argue that a statute passed by Congress in 1917 should trump THE CONSTITUTION.

14th amendment

A more interesting constitutional question is the impact of section 4 of the 14th amendment: "The validity of the public debt of the United States, authorized by law...shall not be questioned."

Why would section 4 of the

Why would section 4 of the 14th Amendment raise an interesting question? It includes the qualifier "authorized by law", which should clearly encompass the statutory debt ceiling. Therefore, a debt ceiling statute would not be unconstitutional on this basis.

Also, in relation to RueTheDay's comment, while the Constitution grants Congress the power to incur debt, it doesn't require the Congress to exercise that power. Thus, a debt ceiling statute could not be unconstitutional on this basis, either.

Re: Why would section 4 of the

The Constitution grants Congress the power to tax, spend, and borrow. Congress decided, in 1917, to delegate some of the administrative aspects of borrowing to the Treasury. It's going to be difficult legally, but more importantly politically, for the Tea Party to argue that such a statute trumps the explicit budget power the Constitution assigns to Congress.

31 USC 3101
(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $6,400,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX of the Rules of the House of Representatives or otherwise.

House Rule XLIX was the original name for the Gephardt Rule (currently XXVII), which simply deems the Debt Ceiling to be raised automatically as part of any budget resolution.

The incoming GOP Congressmen have indicated that they will change/eliminate the Gephardt Rule.

What I'm arguing is that I do not believe, if it ever came down to it, that a House Rule could be used to trump an explicit grant of power by the Constitution.

Re: 14th amendment

The 14A is referencing government bonds that have already been issued, as opposed to the ability to issue new bonds.

The Debt Ceiling was created by the Second Liberty Bond Act of 1917. The intent was to delegate approval of bond sales to the Treasury so that Congress would no longer have to approve each one. In theory, if the GOP blocks an increase in the ceiling, Congress could revert back to approving the individual bond sales needed to raise funds for the budget. Of course, the GOP could block that as well. The administration would then likely stop paying contractors, vendors, and eventually employees rather than default on interest payments.

As I'm typing this, I'm realizing how absurd it is that we're even having this discussion. It saddens and angers me that rather than putting a number of alternatives on the table and then iterating through them until reaching a compromise, that we have politicians who see government shutdown and default as the first best option.

So how does the refusal to

So how does the refusal to borrow more challenge the validity of existing debt?
Please be specific.
This column and this comment of yours simply do not make sense.

Existing Debt. . .

I'm no expert, but I'm pretty sure maintenance of existing debt costs money. If we are left trying to run the government and service our debt only on the available incoming tax revenue I think we might be sorta screwed.

But Congress already has a

But Congress already has a budget process designed to do that on an annual basis. When did the Congress last create a budget????

I'm not sure I see any

I'm not sure I see any connection between a refusal to raise the statutory debt limit and a default on Treasury bonds. Rolling over existing debt would add nothing to the Treasury's gross indebtedness. And interest payments on existing debt are well below total tax revenues.

Of course the inability to issue new debt to finance current operating costs would force significant spending cuts, but that's more or less the Tea Party-types' goal (regardless of the consequences, as is their wont).

Game of Chicken

Bruce: We in the TEA Party are fed up with inside-the-Beltway machinations: America is Bankrupt in all-but name. You need to get over that simple fact, and realize that the longer we postpone the Day of Reckoning, the more painful it will be... And it may not be at a time of our choosing, either: Just look at the mess created when Fannie & Freddie problems were repeatedly kicked down the road: Eventually, the Day of Reckoning came two years ago... And certainly at a date not of President Bush's -- Or the GOP's -- Choosing.

The President will be looking for a $300 billion increase in the $14,100 billion debt ceiling. What if the House passes a bill offering $300 billion (or even a lesser amount, say $100 billion) in spending cuts in March, instead, daring the President to veto it?

Or, what if the House offers to raise the debt ceiling; but attach to it repeal of ObamaCare, which the CBO has now scored as costing many tens, maybe hundreds of billions of dollars, as opposed to PAYGO?

It's a Game of Chicken between the House and White House, with the Senate as the wild card.

Your story is not accurate

Failure to extend the debt limit does not by itself mean debt default.
And what is it with all the insults? Amazing number of them on one page. "nuttier right-wingers"... "The Tea Party people really are crazy enough"...
It seems you've lost your cool.
Perhaps you should get your own facts right before spilling this much venom.

Rude Awakening/Fiscal Commission 2.0

This will prove a rude awakening to many Tea Party Republicans, whom the leadership will either ignore or spank.

If the leadership and the administration can get its act together quickly, raising the debt limit might well be tied to implementing the recommendations of the Fiscal Commission - either the last one or one reconstituted to reflect the current partisan balance. If the latter option is chosen, I suspect a stopgap debt limit extension in the interim, with an up or down vote in the fall on a final package tied to a new debt limit vote.

You could try to convince our

You could try to convince our congressmen to achieve prudence, to always commit to levels of taxation and spending which balance revenue and expenditure into the long-term future. New debt would still be possible when needed, but must be explicitly paid for with future tax-rises. But, fat chance with that one, as we all know.

The problem with that strategy is that it is trying to solve the problem from
the wrong side - the debtors. Could you solve it from the creditors point of view - that is, instead of convincing the politicians, convince the moneylenders *not* to lend?

I think the answer is yes. All you have to do is preemptively and credibly
commit to a policy of sovereign debt-default (either through a single dose of
dollar devaluation and inflation, or pennies-on-the-dollar debt-modification

You could say, "Anybody buying treasuries, notes, bonds, or who have bank
accounts or money-market funds or any other investment-and-savings asset backed
by treasuries, this is your fair warning, because one day, maybe soon, we will
erase at least half the value of those debts - we have no choice. I highly
recommend that you not cooperate and participate any longer in this time-bomb
attempt to bankrupt the next generation, which is immoral and which we will not
allow to occur. To prove we're absolutely serious, the members of our party
have placed a significant amount of our savings in short-positions on USGOV
debt, which means we'll benefit immensely by enacting our policy, or suffer if
we don't. So, if you know what's good for you, stop lending USGOV another
single dime now, or you're just burning your wealth."

Then what happens? All of a sudden, there's a risk premium, and interest rates go up, maybe up a lot. It could start a panic and a crisis. And about that time, people would be coming to your tiny little powerless group trying to *make a deal*. "Please retract your dangerous, reckless statements concerning the security of USGOV debt! It's a crisis!" And then you say, "Here's the deal, we'll take default off the table, you take all forms of endless, unpaid for deficit off the table. Take it, or leave it."

This is the MAD theory of fiscal responsibility. Not "Starve The Beast" but "Credibly Threaten The Beast Feeders". Ignore the Beast - the Beast is hopeless beyond description. The Markets, however, are sane and care very deeply about the security of their investments.

If you want to control the national debt - directly and explicitly threaten that security. Make them feel the Grecian Terrors. They will quickly do all your work for you, and achieve long-term sustainability by force, since reasoning and diplomacy have long-since failed us.

Whose crazy ?

When our public debt is 15 trillion and the rate to borrow the money is 6% instead of 3% and the interest cost is $900 billion instead of $200 billion the least of the problems will be the tea party. You have no problem holding people like myself in contempt because are beliefs are foolish and lack depth. I wonder if your dribble will hold water when the real bill comes due. My guess is that nobody will be interested in reading this crap at that point.

What's better is to

What's better is to technically default on the public debt *now* and raise the interest rate to borrow *now* because we can't govern. You blindly assume that somehow creating a crisis is going to cause these lunatics to suddenly fix the problem.

Fix the problem, don't create a crisis.

I think there's a genuine

I think there's a genuine question as to whether Republicans see a vote for raising the debt ceiling as an issue on which to seek symbolic concessions from the Administration, as an opportunity to drive a hard bargain, or as a means of exerting maximal pressure on Obama and, if necessary, force a default.

Digby at Hullaballo has this from Senator Graham this morning:

GREGORY: Let me break a few of those things down because it's important, the level of detail. Let me start with this. You talk about the budget. You talk about spending. How will you vote on the debt ceiling? Will you vote to raise it which is a vote that will come up in relatively short order?

GRAHAM: Well to not raise the debt ceiling could be a default of the United States on bond and treasury obligations. That would be very bad for the position of the United States in the world at large but this is an opportunity to make sure that government is changing its spending ways.

I will not vote for the debt ceiling increase until I see a plan in place that will deal with our long term debt obligations starting with Social Security, a real bipartisan effort to make sure that Social Security stays solvent, adjusting the age, looking at means tests for benefits. On the spending side I'm not going to vote for a debt ceiling increase unless we go back to 2008 spending levels, cutting discretionary spending...

That's somewhere between the hard bargain and maximal pressure points.

Obama wouldn't hold out for the $250,000 ceiling on the Bush tax cuts: if he's pushed hard on raising the debt ceiling, will he take a negotiating position that says "I won't trade anything significant to meet the obligations of the US government," or will he deal?

Don't EU countries have a debt limit?

Bruce wrote: "No other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue. They correctly recognize that the deficit and the debt are simply residuals resulting from the government’s tax and spending policies. It makes no sense to treat the debt as if it is an independent variable."

Bruce, don't European Union members allegedly have to abide by the Stability & Growth Pact (1997), which limits debt to 60% of GDP? In 2005, it was amended to 3% deficits and 60% D/GDP over a business cycle.

So I think there are at least 16 other countries (EU members) with limits on debt.

You may respond that the EU policy is also "idiotic," as you described US debt limit policies. But you'd be denying that Greece, Ireland, Portugal, Spain, etc., have serious fiscal problems. The debt limit is just a very crude measure for applying some fiscal sanity.

In terms of how it all plays out, I tend to agree with commenter Johnchx: the Tea Party sees the debt-limit showdown as the most effective way to get spending cuts. And the weekly spending cut bills being sent to Congress (as Pete Davis blogged about) will simply provide more procedural and rhetorical weight to their argument.

Intellectual honesty demonstration, please

Bruce Bartlett,
I ask you to FIRST show your readers this massive deception by omission: America’s asset prices' track record is serial herd behavior -- kept out-of-sight to keep fooling the people.

Please see “Real Homes, Real Dow” here:

The news media do know how to do these inflation-adjusted price histories, but show them nearly never.
HOMES, nyt 8/27/2006
DOW, wsj 3/30/1999

Don't Ignore Tax Revenue Cash Flow


Your apocalyptic scenario is hogwash. Roughly 60% of current expenditures are being financed by tax collections and 40% by borrowing. If the debt limit is not increased, then the President has the discretion to decide the most important 60% of the government's operations that require funding. Let me propose a list:

Interest on the debt
Dept of Justice, courts, FAA and other health and safety expenditures
Social Security
Defense Department expenditures deducting research, and other expenditures not directly related to combat or immediate defense requirements.

This list gets us to close to 60%. What's left off the list? Medicaid, Depts. of Agriculture, Interior, Education, Energy, HHS, etc. In other words, all of the federal programs that could be performed at the state level of government as originally intended by the enumerated powers listed in the Constitution and the 9th and 10th ammendments.

A real conservative who cares about cutting federal spending would rejoice at this opportunity. Would you oppose repealing Medicaid at the federal level? Do we need crop subsidies as a federal responsibility?

Here's what Republicans should do: They should accept Bowles-Simpson tax proposals to raise revenue to 21% of GDP. In exchange, the Democrats agree to the repeal of Medicare, and elimination of Depts. of Agriculture, HHS, Education, Energy, and anything else that could be performed by state governments with balanced budget restrictions.

Bruce, would you favor such a bargain? If you don't, then you're just a conservative tax collector for the liberal welfare state.

Yeah, I'll believe that.

I can assure you that my rock-ribbed conservative Republican Constitution-above-all neighbors here in South Dakota are not going to agree to elimination of the ag department and its subsidies.

And why are you exempting the War Department (there was a lot more honest when the civilian arm of the military did business under that name), when we spend more money on the military than every other country in the world *combined* ?

"There has been no rapid rise in funding for domestic discretionary programs in recent years; in fact these programs have shrunk both as a share of the budget and as a share of the economy.

"In contrast, funding for defense and related programs has exploded. Since 2001, it has jumped at an annual average rate of 8 percent, after adjusting for inflation and population — four times faster than the average rate of growth for Social Security, Medicare, and Medicaid (2 percent), and 27 times faster than the average rate for growth for domestic discretionary programs (0.3 percent)."

But hey, I'll give you credit for at least presenting *some* kind of a plan. That's more than most conservatives/tea partiers do.

Starving and dying on the streets

" In exchange, the Democrats agree to the repeal of Medicare, and elimination of Depts. of Agriculture, HHS, Education, Energy, and anything else that could be performed by state governments with balanced budget restrictions."

How do you propose the states fund Medicare and Medicaid? We have a $6 billion shortfall in Minnesota state budget, with some advocating that state HHS programs be cut 20% across the board. Education has already taken a huge hit, and our own most famous right-wing tea party Congresswoman, Michele Bachmann, receives hundreds of thousands of dollars in farm subsidy welfare payments. You think she's gonna want to throw out the ag department and her government welfare checks?

Get real.

Give me a break. Market

Give me a break. Market participants are pricing 10 year treasury's to yield 3.35%, within about a percent of all time lows. Credit default swaps on U.S. treasurys sell for a few basis points per $1000.

If the market gave any credence at all to your fear mongering of a "very real prospect for default", yields on treasurys and prices for credit default swaps would be going parabolic.

Your never ending effort to smear Republicans is shameful. But the name calling in your column at least is consistent with the leftists you now identify with.

Exactly right

What a pile of nonsense this article is....seems to be a lot of Keynesian based economics professors who don't understand bond investing out of late.

Bill Gross was on CNBC this AM...said the debt ceiling would have to be raised and it will. He's is more concerned about Dept to GDP and Deficit to GDP ratios.

But the bottom line is the will to make the spending cuts necessary is simply not there. If it were there for both parties this would be done easily. It is not...and so we raise the debt ceiling yet again.

Let's try to keep it at 2.5% of GDP for a year idiots in DC.

According to Bruce Bartlett,

According to Bruce Bartlett, only "nutters" would vote against raising the debt ceiling. I guess that explains why Obama voted against raising the debt limit in 2006 when he had this to say:

"The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. … Increasing America's debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and
grandchildren. America has a debt problem and a failure of leadership. Americans deserve better." -- Then Senator Barrack Obama, March 20. 2006

You hit the nail on the head.

You hit the nail on the head. A major consideration in raising the limit is based on "who" gets to spend the money. The elite in DC from both parties only want to keep the gravy train going to their projects flush with cash so contributions flow to their accounts. Why does the debt "limit" matter when Ben can just keep printing as much as he wants. Bruce's views are to fire cheap shots at the citizens trying to take back control of OUR government from neo-Marxists that have controlled DC for far to long. I did not hear Bruce's call out the Marxists when Obama regime spent more in 18 months than all other presidents, and he did it with DEBT.
If it take a revolution to return control to the people now is as good a time as any, and much better now than to "kick" this can down the road on our children and grandchildren to confront. We made this mess and we need to fix it NOW!

Your otherwise sound message

Your otherwise sound message is diluted by false facts. The national debt was $10T when Obama took office and the debt ceiling we're talking about raising in two months is a less than $14T. So Obama borrowed less than $4T, most of it as a result of the deepest lost of revenues (from the Great Recession) as a percentage of national income since the Great Depression.

BUSH is the one who borrowed more than all other Presidents combined. He took office with $5T and left office with $10T.

So spending more than taxing is a bi-partisan tradition in D.C., but so far the Republican dominated government is ahead in the debt creation sweepstakes. That is because they are the party of borrow and spend, vs. the Democrats' tax and spend.

If the Tea Party can change the direction of Republicans and reinstate fiscal prudence, I'll be happy to climb aboard that train. But forgive me if I make sure first of the direction in which it is headed. So far, the signs are not hopeful. The extension of the Bush tax cuts just added trillions of debt over the next several years and already the House leadership is talking about a budget compromise that would require only $100 million of actual spending cuts. As I say, they seem incapable of spending cuts without even larger tax cuts for their wealthy consituents.

But then again, who is ready to join a "tax and cut" party?



Call me Crazy

Mr. Bartlett apparently didn’t look very hard for examples of other countries with debt ceiling limit mechanisms. According to a study by the World Bank, 10 of 18 countries they surveyed had debt ceiling limits as institutional debt management tools. (table 2).

Further, as commenter Hondo correctly points out, the EU effectively imposes a debt ceiling limit on EU members as a result of the Stability Pact. Bartlett is himself a bit contradictory on this score. He argues that EU countries such as Greece have implicit debt ceiling limits due to the lack of control over their own currency whereas the United States is not subject to this natural impediment to incurring debt. What Bartlett has failed to acknowledge is that one of the very reasons a debt limit statute is needed is precisely because the United States is not subject to the other type of limits countries such as the Member States of the EU are.

Finally (well, perhaps not finally) Bartlett ignores some of the other more persuasive reasons for a debt limit statute. Requiring Congress (and indirectly the public) to periodically pay special attention to the overall debt is valuable because it requires us to focus on the debt forest rather than each specific appropriation or revenue tree. I think it makes sense to periodically review how much the country is in hock, and is willing to be in hock at the expense of future generations, and to set spending priorities at least somewhat from that perspective rather than to focus merely on the spending side. This is perhaps what Krishnakumar meant when she argued that the debt ceiling limit acts as a check on party and interest group politics.

The bottom line is that the periodic arguments over the debt ceiling are contentious and messy, but they are probably worth the while in the context of the system we have. At the very least, those who argue against the merits of the debt ceiling legislation should come to the table with substantive counter-arguments ‘(and accurate facts) rather than the epithets like “crazy”, “nutty”, "stupid", etc., which are really not arguments at all.

The Fed....

Can simply buy treasuries and retire them to get around the Debt limit. Treasury bonds serve no practical purpose in our current monetary system, they are simply a savings account.

not a bachmann fan

Ironic that the add that comes up for this page is Michelle Bachmann's PAC asking us to sign the petition to "tell Congress not to raise the debt ceiling." Awesome.

Economic ruin as a means of political gain

I don't think there's any doubt the tea potty people and the gop would be happy for another financial crisis to improve their chances in 2012. The worse the economic conditions, the better their chances. There is absolutely no reason for them to do anything that will revitalize the economy or reduce unemployment and every reason for them to maintain the status quo or make conditions worse.


In my earlier post, I meant to suggest that Republicans propose the repeal of Medicaid not Medicare. God, I just can't keep those programs straight.

Anyway, I hope that you share my thinking that a responsible Republican Party would use the threat of the debt limit to force Democrats to make radical spending cuts along with tax increases.

HOWEVER, Republicans could not get away with using the debt ceiling vote as leverage unless they propose an even-handed way to reduce the deficit that is credible with the public.

If Republicans agreed to Bowles-Simpson tax revenue increases, then Obama would be screwed. He could not reject radical spending cuts out of hand if Republicans agree to the tax proposals offered by his hand-picked commision.

The problem is that Jim DeMint, Grover Norquist, and Stephen Moore believe that raising taxes is the devil's work but increasing spending is OK with the Lord. Otherwise, the Republican party could start acting like a real conservative party instead of drunken sailors.

You write: "The historically

You write: "The historically low level of real and nominal interest rates on Treasury securities is proof that there is still strong demand for Treasury securities."

If this is true, why is Bernanke and the Fed buying hundreds of billions of dollars worth of them?


Most of these comments are SCARY. Debt issuance is merely one of the two tools required by Treasury to finance today's spending on programs created by Congress.

If one wants to reduce spending, it should be done by other means - not by recklessly impeding the ability of Treasury to do its job. The latter ONLY will result in INCREASED costs to the taxpayer. How? Treasury will be forced to alter its debt issuance and possibly pay a higher coupon rate (market determined) on the new debt than it otherwise would have. I personally don't consider devoting a greater share of Americans' future earnings to the payment of interest a wise investment, do you?

Good Grief!

Bruce, your critics' comments confirm my worst fears about the notions - can't call them "thoughts" - of the Tea Partisan wing of the GOP and their influence on other Congressional Republicans. But even as I head to the bank to cash in the rest of my Series E bonds to beat the default, I'm wondering what effect the default will have on the dollars I receive. Should I be converting them to Euros or Renminbi?

Easy Political Points

More easy political points for cut-and-spenders. Don't we have this discussion every couple of years?

The Enormous Irony is

That right at the top of this page, "Michele PAC" has an ad exhorting readers to "Sign the petition" -- "Tell Congress not to raise the debt ceiling." In the ad is a smiling photo of one of the world's most dangerous fools.

Don't you have any control over who advertises here, Mr. Bartlett?

I agree: holding hostage government's ability to continue to pay the existing debt in future at a decent interest rate is the most unreal kind of outrage. Children playing with matches, indeed.

I note that, according to some sources, Fannie and Freddie just settled their dispute with Bank of America for less than one penny on the dollar of what they were owed. I think we all know who owns us at this point. How much you want to bet the big boys have already taken a position short/or in CDS against the US? Just business, you know.

How is it in 2002, you

How is it in 2002, you claimed the US debt limit was simply a device used by Congress to sound off on debt (while spending freely), yet now it's a mechanism for which default may occur:

"To put this government debt in perspective, the debt held by the public was just $3.3 trillion. However, this really overstates the figure because the Federal Reserve held $534 billion of that. Since the Fed is part of the government, that debt is essentially meaningless, leaving a net debt of $2.8 trillion. Thus GSE debt effectively exceeds the national debt.

Many economists have long believed that the debt limit is simply an anachronism, an opportunity for members of Congress to grandstand against the federal debt, even as they vote to increase spending year after year. The debt limit increase is a charade, which does nothing to actually hold down federal indebtedness. It is long past time that it should be scrapped."

Apples and Oranges...

I'm starting to think that this is a problem of Apples and Oranges (yet most think it's just Apples).

I understand the sentiments of the Tea Party and others who don't want to raise the debt ceiling. And this is NOT just a Tea Party issue. MANY Independents, Repubs AND Dems feel this way. They've watched for years as the government has been TOTALLY incapable balancing a budget. Dems never met a spending program that they didn't like. Reps never met a tax break they didn't like. Stimulus. War. Bail-outs. Whatever. But it all boils down to this... we spend more than we bring in... and you can tax the wealthy until the cows come home and it won't balance the budget.

They see a vote against raising the debt ceiling as the only way to reign in spending. It's a way to force the hand of congress to balance the budget (apples).

They are simply (and totally) frustrated by the debt. And they have supported elected officials who share that frustration. They aren't looking at this from a 'default ramifications / global economy' perspective (oranges). And they don't really believe it will come to that. They hope/believe that Congress will be forced to balance the budget.

Yes, it's resulted in many 'non-economists' being voted in... but let's be honest... the "professional" politicians (in either party) haven't been stellar performers. And don't give me the GWB-Blame BS... lest we forget that the economy was in a slide when he took office. I'm not a big "W" fan, but I'm not gonna use him as the scape-goat... particularly with Dems in control for the last 25% of his presidency. It's a naive argument.

I know some Tea Party folks. They aren't nutty right-wingers. They aren't stupid. They're just frustrated and they've found a voice. So, instead of insulting them (wrong by any standards), welcome them to the party and engage in a respectful dialogue. I am TOTALLY convinced of this. They WILL listen to rational and respectful debate.

Unfortunately, from what I've seen, it's become quite trendy to just blast them as incompetents. That type of arrogance is what got us into this mess.

Just one man's opinion.

Just One Man's Opinion?


Thank you for this thoughtful post. You are not the only one dismayed by the lack of argument and the excess of rhetoric in this debate. Obviously, the slander (or better here, libel) comes from both ends of the spectrum. Since I don't tend to read or listen to very much from the right side (Fox News, etc) I'll restrict my observation here to the stuff I read on this blog and from folks like DeLong and Krugman. While these are obviously intelligent people, I really have to wonder why they so often resort to epithets like "crazy", "idiotic", "moronic", "stupid", "nut case" etc;, in their "smack downs" with respect to those who don't share their policy or ideological views. It is obviously disrespectful and rather leads one to believe that they are otherwise incapable of encountering their opponents with rational arguments. It is quite effective if one's purpose is to accumulate a loyal following of like-minded and rather closed-minded folks, but it is very ineffective if one's purpose is to persuade persons who are open to persuasion by through intelligent conversation.

I was once taught that a good rule for writers of literature is that they should "show" not "tell". Thus, in describing an idiot, one should not simply call him or her an idiot. It is much better style and far more effective to accurately describe the behavior or views of a character that would lead readers to draw that conclusion. I think that might be a good rule for policy bloggers, too.

It's often an effective style

It's often an effective style to make a salient point when replying to the charge of being useless.

I'm happy to see that even the most crafty attempts at right-wing snark lack even an elementary backing of economic rigor. I hear the Washington Post is hiring; perhaps your comments would be better received within their walls.

What is your salient point?

Are you suggesting that it is impossible to say something that has "economic rigor" without being uncivil? Or, are you suggesting that people who don't share your views should simply go elsewhere?

Elimination of Social Security

Am I the only person who noticed the elimination of Social Security in a previous post? I'm no expert, but this could cause sort of a problem for millions of people. No, I don't know the answer, but this idea is more than a little wacky.

I might be a budget redneck if......

I am not an economist. Or a budget or fiscal policy wonk. I fail to see, however, the connection between a refusal to borrow more money and a default on existing debt. NO ONE I know personally or have heard speak form the TEA party has suggested that we default on our existing debt. That's asinine. I believe that failing to allow the government to borrow more money would create a crisis-but one of funding ongoing government function. A bloated, inefficient, wasteful government. It's kind of like taking away the credit card you imprudently gave your kid. You still have to pay for what they charged, but no new charges occur. I have to spend less than I earn every month. Don't tell me the government should be different. Any system that we allowed to arise around such an irresponsible way of operating SHOULD be allowed to fall by the wayside, however painful it might be in the short term. WHAT are people more afraid of? The short-term pain of resetting the thermostat on the furnace or the long-term pain of running out of fuel altogether. No business or family in this country can continue to function financially if it borrows itself into insolvency. And that's where we are. It's time to stop it. So, if you want to call me nutty, or ignnorant, or naive, or whatever other terms you Allinsky disciples use to ridicule and demonize your opposition, go right ahead. Just don't come to my front door until order is restored after the inevitable crash; I already have rounds chambered.

Debt is not meaningless

I don't consider my U. S. Treasury holdings and those held by the Chinese to be meaningless.

Who is threatening default?

... a danger that Congress will not raise the debt ceiling in a timely manner, meaning that the Treasury may not have sufficient cash to make interest payments or redeem maturing securities.

How would the Treasury not have sufficient cash?

Debt can be rolled over forever without requiring the debt limit to be increased by a single penny -- that is definitional. It takes *no* cash. And at today's historic low interest rates, rolling over anything but the shortest-term debt reduces interest cost.

What increases debt, and requires an increase in the debt limit, is deficit spending -- that's definitional as well.

So what you are *really* saying here is: Deficit spenders consider their ability to deficit spend so much more important than the national credit rating that they intend to take funds needed to pay interest on the debt and redeem US bonds and instead use them on all their favorite consumption instead, breaking the credit rating of the USA.

I.e., they are blackmailing the national fisc by using the threat of forcing a default to force financing of their continuing consumption -- they are going to keep spending come what may, regardless of the consequences.

Now eliminating deficit spending at a shot by not increasing the debt limit may or may not be wacky econo-loon nuttery -- definitely counting President Obama himself and a whole bunch of other leading Democrats as wacky econo-loon nutters if it is, for taking the very same "freeze the debt limit" position themselves back when they were the outs rather than the ins (now matter how responsible you care to deem them now). Be that as it may.

But *not* increasing the national debt does not cause default any more than *not* increasing your mortgage and *not* increasing your credit card balance cause *you* to default.

If with your income the same or rising you *don't* increase your debt, yet you do default on it, then it's simply because you *chose* to spend your income on something other than paying the debt you owe, because it is more fun for you or whatever.

It's the exact same with the government. Claiming that *not* increasing its debt will cause it to default is bizarre. A govt with a stable, fixed level of debt and rising income clearly *can* finance its debt and avoid default -- its politicians are simply choosing not to, and trying to throw blame for the consequences on someone else.

"Not increasing debt is default!". Orwell would love it.

Good Point

Very good point Jim Glass. I also had wondered how failing to raise the debt limit would somehow restrict redeeming maturing securities. Put simply, if you redeem a maturiing security with a face value of $100 that reduces the debt by $100. Simultaneously issuing a new security for $100 to finance that redemption increases the debt by $100. The two transactions are a wash. There is no need to raise the debt limit to do this.

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