Anyone tuning the television or surfing the Net these days is no doubt aware of the discussion in the halls of U.S. Government on the topic of raising the debt ceiling. What exactly does this mean? It means simply that the government can issue new, funded debt above the current limit. This funded debt is the combined borrowing of the United States. The borrowing is the summation of all budget deficits from the past as well as any interest on this debt that needed financing with new debt. The government gets to do something that individuals cannot and that is rolling over debt every year. Lately, this debt rollover occurred at very low interest rates. Imagine having a credit card bill that was as large as your yearly household income except that you were obligated to pay off this debt every so often. If you did not have the ability to pay it off as scheduled, you would have to find someone else to loan you money to pay off the old debt plus any interest. You might be able to do that for a few cylces until your creditors were exhausted.
The U.S. Government gets to roll its debt over continuously since its creditors do not get exhausted. Much of the discussion now is of a default if the debt ceiling were not raised. This default is not necessarily tied to keeping the debt ceiling at its current level. A default would only occur if the U.S. Treasury were prohibited from paying its creditors and to our knowledge only Congress could authorize such action. The likelihood of Congress authorizing this action is slim and none. The immediate effect of not raising the debt ceiling would be the impact on current government expenditures. Since the government has been running $1 trillion+ deficits for a few years now, the frozen debt ceiling would mean they could only run government on current revenue and NOT new borrowing.
Wrapped in this debate is what the implications are of raising the debt ceiling on the U.S. Dollar. The upcoming August issue of The Sentinel Financial Report (TSFR) illustrates how raising the debt ceiling is not necessarily correlated to a drop in the value of the greenback. This debate is a serious one. Even though the debt ceiling has increased 11 times in the last 15 years (bet you did not know that), the current debate has risen into the national dialogue. This is a very healthy debate though it is important to separate the facts from the hyperbole coming out of Washington. The national debt will be THE defining political and economic issue of our time as discussed in Escaping Oz: Protecting your wealth during the financial crisis.
Jim Mosquera is the author of Escaping Oz: Protecting your wealth during the financial crisis and is the editor of The Sentinel Financial Report.
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