Nick Massey
Special to The Sun
EDMOND —
“I’ve always depended on the kindness of strangers.” So said Vivian Leigh in her role as Blanch in the Tennessee Williams play “A Streetcar Named Desire.” We might say the same thing in the U.S. as we have depended on foreign countries to buy our debt and finance our excessive spending. Now the problem is coming to a head as we wrestle with how to deal with it. One of the discussions front and center now is the debate over the national debt ceiling and whether to raise it or not. For those who like political dog fights, this is like the Super Bowl.
Recently, Treasury Secretary Tim Geithner notified Congress that the public debt limit will become binding soon and Treasury will no longer be able to borrow additional funds. Nevertheless, Congress is taking its time on raising the debt limit with some lawmakers still saying they will not vote for an increase under any circumstances.
There is no question that we need to reduce government spending, balance the budget and reduce government debt. If you have been reading my columns you know I have been ranting about this for years. However, the debt ceiling is a separate subject and should not be confused with how we balance the budget and reduce government debt going forward. The debt ceiling involves money already spent or obligations made. Like them or not, existing debts and obligations need to be paid.
If you had $100,000 worth of obligations this year and your income was only $80,000 you are going to need to find $20,000 somewhere. You will either need to find additional income to make up the shortfall, or borrow the money, or default on some of the obligations. If your personal debt ceiling is $100,000 and you can’t borrow any more, and you can’t bring in additional income, you will default.
Is this the solution we are suggesting for the U.S government? I certainly hope not because the consequences are unthinkable. We would lose our AAA credit rating. Many countries and entities would no longer be allowed to buy our debt. Interest rates would skyrocket and the cost of renewing current debt would go up. All other interest rates would move up also and immediately put a halt to our current weak economic recovery. Recession is too mild a word for what will happen.
The federal budget deficit and debt didn’t just suddenly happen. It has built up for many years. There is no shortage of people to blame, but that is not what is important here. I have no problem with political maneuvering to reduce spending and reduce government debt. But the debt ceiling is just a number and it’s important not to get bogged down in this and lose sight of the goal. Playing chicken with the economy and the debt ceiling is political grandstanding and quite reckless.
It’s reckless because failure to raise the debt limit not only threatens a default that potentially could destabilize the entire world financial system, but potentially could deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees and shortchange savers who depend on interest income.
It is difficult to comprehend the vastness and variety of payments the Treasury must make every day. Here are just a few samples: On May 2 it paid out $6.4 billion in interest on the debt, $4.5 billion to retired federal workers, $3.7 billion to military retirees, $2.6 billion to house the indigent and $1.6 billion in federal salaries, among other things. On May 3, the Treasury paid $21.8 billion to Social Security recipients, $1.6 billion to Medicare providers and $1.6 billion to vendors that sold supplies to the Department of Defense.
On most days, the Treasury does not take in enough in taxes to cover its payments. On May 2 it took in almost $26 billion, but on May 3 it took in less than $4 billion. Through May 3 the Treasury had received a little less than $1.3 trillion in taxes for fiscal year 2011, but had made payments of almost $7 trillion. The reason the payment number is so large is because it includes funds that were paid to Treasury’s lenders, whose bonds matured and needed to be paid off. Redemptions to owners of Treasury bonds eat up a vast amount of its cash on a day-to-day basis.
Because the federal government runs a budget deficit, the Treasury must borrow a little more on most days. On May 2, there was a net increase in Treasury borrowing of $33 billion, on May 3 the increase was $11 billion. This is how much the national debt increased on those days. As of May 3, the total amount of debt outstanding was $14.28 trillion and the debt limit is $14.29 trillion.
Some have argued that as long as it has sufficient monthly cash flow from taxes to pay monthly interest on the debt, then the Treasury can just stop making other payments. That could include payments to doctors and hospitals that provide Medicare services, stop paying salaries to federal workers, stop paying vendors that provide food and ammunition for our troops in the field, and stop paying Social Security benefits. Are you kidding? Does anyone really want to go down that path?
The real issue with the debt limit isn’t whether the government should run a budget deficit or if the deficit is too large. That is a big problem that needs to be fixed. But the debt ceiling is about cash flow and making sure that the Treasury has enough on a daily basis to pay its bills and neither inconvenience nor break faith with those who sold goods and services to the government, loaned it money, or depend on federal programs for life and health. The word “irresponsible” is inadequate to describe those in Congress who use doubletalk to justify refusing to raise the debt limit. They are playing with fire and are going to get us all burned. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.
