Debt Ceiling

The debt ceiling has been in the news a lot lately. If ever there was a red herring of a subject, it is the debt ceiling. Let’s take a look at why.

The What?

Let’s start with the foundation of the issue. What is a debt ceiling and why does it matter? Well, the debt ceiling is an arbitrary number Congress selects. The number reflects the total debt level the government can carry for the period in question. You can think of it in practical terms as the credit limit on the government’s credit card.

Why It Matters

By this point, you probably know that the big hubbub across the country is we’ve run up against the $14.3 trillion debt ceiling. We are running about a $1.7 trillion dollar deficit in 2011, so we need to raise the ceiling or default on our debt payments. Actually, we’ve already crossed the ceiling, but the government has continued paying the debt payments instead of putting money into pension plans! This fiscal trick will run out around the end of July or early August.

What Is Happening?

The current scuttlebutt is a supposed battle between fiscally conservative Republicans who control the House of Representatives and President Obama and the Democrat majority in Senate. In truth, this is pure theatre by both parties. The simple fact is neither party has the will power to really balance the budget at this point, particularly since we are a year and a half away from the next Presidential election.

The Bluff

The current hemming and hawing is all one big bluff. The truth of the matter is the country would be crushed by a default on our debt and the politicians all know it. This is where the entire trick of the process comes in. Remember how we noted that debt ceiling is like a credit card limit? Well, guess who sets that limit? Yes, Congress. The Representatives and Senators can raise the debt ceiling any time they like and have done so just about every other year for the last 10 years. You can expect them to do it again this year.

Is the debt ceiling debate much ado about nothing? No. While the outcome is clear [a higher debt ceiling will be passed], the debate does highlight the fact we up to our eyes in debt and adding to the total each and every day. Sooner or later, something is going to need to be done about that. Let’s hope our politicians show the intestinal fortitude to act before a financial crisis occurs that makes the Great Depression look like a tea party.

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