I need help understanding this debt business.

[BigSkyBob]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

It would be interesting to see the contingency plans that Timmy and Ben have allegedly drawn up if we do get to that point.

I'd imagine the interest on current outstanding federal debt would have to come first as far as payments. After that? Probably Social Security and federal pension checks. I wonder what the lowest priority programs are that would get the axe first. 

Highway projects will be delayed. There "cuts" that aren't cuts because as the projects are delayed, the HTF will grow resulting more spending later.

[WillK]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

It would be interesting to see the contingency plans that Timmy and Ben have allegedly drawn up if we do get to that point.

I'd imagine the interest on current outstanding federal debt would have to come first as far as payments. After that? Probably Social Security and federal pension checks. I wonder what the lowest priority programs are that would get the axe first. 

I suspect that after interest payments on the debt, the armed forces would be paid, Congress would gets its paychecks (the bastards), social security checks would go out and then what would be classified as essential state department/cia, etc functions. 

After that....  massive layoffs, closures of services, end to contracts, etc

[BigSkyBob]

Given the reality of the current political class, tax increases are pointless. Any increase in revenue will be matched with a corresponding relaxation of fiscal discipline until it is a wash. Cutting spending must be taken seriously. That is what has to change.

A few pointers for the mentally challenged OP:

(1) None of the "plans" that have been proposed are anything more than complete jokes, with the exception of the Coburn plan, which he conveniently ran away from the day after in typical politician fashion.  Simply put, the plans either slow down the rate of spending increases over time, increase tax revenues by insignificant amounts over time - this will not solve anything.  Nor is anything done about the medical system.  This new "Super Congress" plan I heard about today is the worst thing yet - basically they are saying representative government doesn't work anymore, and only a certain few selects behind closed doors can make any decisions.  Nice.

Even more amusing to me, Obama has not proposed any plan, though the media keeps trying to say that he has.  Now, it is quite within Obama's prerogative to wash his hands of the matter - taxing and spending is a Congressional power for good reason.  But you can't pretend like you want to be involved and then propose nothing, get involved in the mess and whine when people won't listen to you.  It's like the guy has been a community organizer all his life, or something.

(2) A US sovereign debt downgrade will happen within the next 6-12 months, maybe sooner regardless of whether the debt ceiling is increased or not, unless a plan for real cuts and revenue increases occurs, or unless the agencies are being openly bribed behind the scenes (which is a different problem, but possible).  In my opinion, they should have downgraded six months ago.  Egan-Jones, which no one ever listens to, but is always ahead of the curve, already has.

Folks don't ever seem to read these reports by S&P and Moody's - but basically their big concern has to do with government deficit vs. growth-in-GDP ratio and the amount of interest expense, and the fact that government revenues must be increased or spending must be cut sharply, and without option.  Essentially, they will downgrade unless they get real action that this is going to be addressed in the next few years. 

Taking a look at the bigger picture indicates that unless the government deficit amount gets below the growth-in-GDP, the whole thing will blow up - and we're not talking about decades here, more like years.  At most it is 5-10 years, since the deficit is 12% of GDP and the growth in GDP is about 2%, creating at present an interest expense of about 12% of the annual government intake, which grows exponentially, and will balloon if interest rates go up materially.  And in order to do that, the number that has to be cut is around $1 trillion + the amount that is lost in GDP through reduction in spending over probably say 3-5 years max, which probably comes to more like $1.5-$2 trillion.   Yes, it does mean about -10% to -15% decline in GDP at minimum, but that's already baked into the system.  These are real cuts, not reductions of increases.  If we take the other road, by using increase in tax revenues only, you would need to increase the tax revenues by at least $1 trillion over 3-5 years max, and probably more, since there is a drag on GDP from tax revenue increases.  And that drag will not go away over time, which the spending decrease would.  And something must be done about the medical system in all of this - that is not optional.

My summation is that, based on these numbers, if something is not done in two and three years, it will be impossible, and I guarantee that the US will default in some form or another.  Now is the best time to do it, period.  We may get more time than we should after the two-three years to blow up because Europe is so f-ed up, but we are not Japan.  Japan will blow up too, just differently.

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  If the Feds somehow did default, it would be of their own doing, and would be clear grounds for impeachment of officials, as this is what the 14th Amendment language everyone has been crowing about recently is meant to protect against.  Also, don't forget that a lot of the debt is intragovernmental obligations (i.e. SS/Medicare "trust fund") and can likely be "defaulted" and maybe already is in such a state.  It is not public debt.
 
My position has, from the beginning, been - the debt ceiling must not be raised until there is a plan for dealing with the issues in point #2.  It is probably the last, best chance to do it.  If nothing is done, or no one has a plan to do it, then the debt ceiling should not be raised, and people have to face the consequences.  Because if it is bad now, imagine what it'll be when there's no way to stop the inevitable.  Depressing, eh?

A - I'll presume that you are unaware I have Autism and let your first comment pass
B - I don't see why you can't solve this by raising taxes to the proper levels? And I'm not talking about a puny 25% increase.

[BigSkyBob]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

The spending won't be paid for because the underlying spending will be cancelled. Choosing to cancel appropriated spending is not violating "the full faith and credit of the USA." Both federal and state governments do exactly that all the time. States often cancel appropriated spending projects because revenues turn out light, while federal appropriations are sometimes not spent because the underlying need for spending turns out to not materialize.

[Marston]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

It would be interesting to see the contingency plans that Timmy and Ben have allegedly drawn up if we do get to that point.

I'd imagine the interest on current outstanding federal debt would have to come first as far as payments. After that? Probably Social Security and federal pension checks. I wonder what the lowest priority programs are that would get the axe first. 

I suspect that after interest payments on the debt, the armed forces would be paid, Congress would gets its paychecks (the bastards), social security checks would go out and then what would be classified as essential state department/cia, etc functions. 

After that....  massive layoffs, closures of services, end to contracts, etc

 

Yeah, you're probably right. If we do get to that point, I wouldn't be surprised if it was some of the small ticket items that are cut that get people really pissed. I can just imagine a woman ranting on CNN how she can't visit the Smithsonian's with her kids on vacation because they're closed.

[Person Man]

Goddamn. This is very complex and simply too depressing to give it much thought but when I see graphs like this



I think you can see Sam's point. I mean, the only real way to get out of this is to either 1) curl up in a ball a prepare to take a recession the size of the global one in  the 1340s or simply tax the way opebo wants to tax and spend the way that someone like Vorlon, Zarn or Mech would want to spend. Maybe that would basically cause us to go into a 1930s style recession instead.

Then again, both of these alternatives are more retarded than even simply going to our creditors and telling them to burn thier bonds and promisary notes or get waterboarded the rest of their lives in Gitmo.

[WillK]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

The spending won't be paid for because the underlying spending will be cancelled.

That is an very inaccurate description of what could happen if no deal is reached.

You are talking about a completely different phenomenon than what is happening.  This is not a case of the underlying need for funds not materializing or some future work being canceled; this is a case of a lack of funds to pay existing invoices or existing payrolls -- the 'need' for the funds has already materialized and is ongoing.

You must be logged in to read this quote.

If the law says that $X,000 will be appropriated to say fund the national parks or pay for food safety inspections or fund highway projects or pay leases on the office space used by the feds, then the feds go out and do those things.  But if there is no money to pay the bills that have been incurred to do that which was directed by law, then the US shows it is unable to pay its own bills  (or really unwilling to pay its bills, since the debt ceiling is an arbitrary self-imposed limit).  If the US shows it is unwilling to pay its bills, then it has undercut that 'full faith and credit' of the country.

Example:  several engineering, architecture and construction firms are currently working in the Boston area on an infrastructure project funded by the federal government.  They will be sending in invoices in August for work done in July.  If the debt limit is not increased, the feds will be cash constrained.  After paying bond holders, social security recipients, military personnel, and a few other "essential" items  there will be no cash on hand remaining to pay the invoices to those firms.   In the normal course of business, if a client refuses to pay for work done in accordance with a signed contract, the business integrity and credit worthiness of that client would be called into question.

[WillK]

Here is a more powerful description:

If the debt ceiling is not raised, "Treasury could exhaust all inflows for the month of August by paying only six major items: interest on our existing debt, Medicare, Medicaid, Social Security, unemployment insurance and defense contracts. Without cutting from these items, there would be no money to fund entire U.S. departments, such as Justice, Labor, and Commerce. There would also not be funds to pay for veterans’ benefits, IRS refunds, military active duty pay, federal salaries and benefits, special education programs, Pell Grants for college students or food and rent payments for the poor.
...
BPC’s research shows that the day-to-day outlook would be even more harrowing. For example, if the cash shortage begins on August 3, as projected by Treasury, the government could find itself unable to make a $23 billion Social Security payment that has to go out that day."

Quote from here:
http://www.bipartisanpolicy.org/news/press-releases/2011/06/bipartisan-policy-center-releases-new-analysis-debt-limit

[WillK]

Here is an interactive tool to help understand the choices if the ceiling isnt raised by next week:

http://about.bgov.com/2011/07/12/august-invoices-show-u-s-treasury%E2%80%99s-limited-choices/

[BigSkyBob]

(3) If the debt ceiling is not raised, the US will not default.  The Feds will have to choose who receives funds and who doesn't.  ...

Unless there are legislated budget cuts, then the executive branch will have to decide which laws to enforce and which to ignore.  While it will not default on debt payments, failure to pay legislated spending will undercut the 'full faith and credit' of the US.

The spending won't be paid for because the underlying spending will be cancelled.

That is an very inaccurate description of what could happen if no deal is reached.

You are talking about a completely different phenomenon than what is happening.  This is not a case of the underlying need for funds not materializing or some future work being canceled; this is a case of a lack of funds to pay existing invoices or existing payrolls -- the 'need' for the funds has already materialized and is ongoing.

Well, paying such debts will have to have a priority just after paying interest on the debt. The "payroll" situation could resolve itself in two week as nearly every bureaucrat is furloughed.

It would be tough, but, it wouldn't be the end of the world, just the end of the world to which  the political class has grown accustomed.

You must be logged in to read this quote.

If the law says that $X,000 will be appropriated to say fund the national parks or pay for food safety inspections or fund highway projects or pay leases on the office space used by the feds, then the feds go out and do those things.  But if there is no money to pay the bills that have been incurred to do that which was directed by law, then the US shows it is unable to pay its own bills  (or really unwilling to pay its bills, since the debt ceiling is an arbitrary self-imposed limit).  If the US shows it is unwilling to pay its bills, then it has undercut that 'full faith and credit' of the country. [/quote]

THe above paragraph is complete nonsense. If the government passes an appropriation, and, later rescinds it, that is between the government and the government, not the government and creditors.

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Obviously, debts of the United States would have the higher priority.

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Which is why it would important to place paying such bills before other governmental programs.

[○∙◄☻¥tπ[╪AV┼cVê└]

Goddamn. This is very complex and simply too depressing to give it much thought but when I see graphs like this



I think you can see Sam's point. I mean, the only real way to get out of this is to either 1) curl up in a ball a prepare to take a recession the size of the global one in  the 1340s or simply tax the way opebo wants to tax and spend the way that someone like Vorlon, Zarn or Mech would want to spend. Maybe that would basically cause us to go into a 1930s style recession instead.

Then again, both of these alternatives are more retarded than even simply going to our creditors and telling them to burn thier bonds and promisary notes or get waterboarded the rest of their lives in Gitmo.

This one is more impressive.

[WillK]

If the law says that $X,000 will be appropriated to say fund the national parks or pay for food safety inspections or fund highway projects or pay leases on the office space used by the feds, then the feds go out and do those things.  But if there is no money to pay the bills that have been incurred to do that which was directed by law, then the US shows it is unable to pay its own bills  (or really unwilling to pay its bills, since the debt ceiling is an arbitrary self-imposed limit).  If the US shows it is unwilling to pay its bills, then it has undercut that 'full faith and credit' of the country.

THe above paragraph is complete nonsense. If the government passes an appropriation, and, later rescinds it, that is between the government and the government, not the government and creditors.

You are struggling to grasp the reality of the situation.   A failure to raise the debt ceiling does not rescind any appropriation.

[WillK]

New article from NYT that explains debt ceiling situation well:

http://www.nytimes.com/2011/07/28/us/politics/28default.html