That Ceiling...

Ok, I’m putting a history post on hold to comment on the debt ceiling.  So let me dive right in here…

First, some definitions, since I know some people don’t understand federal finances, especially with all the hype surrounding this stuff.

Budget deficit: any budgeted spending above the amount taken in by revenues for a single year.  Just like in a household budget, if you spend more than you bring in, you have a deficit.

National debt: the amount owed by the government at any given time.  This is the debt built up from years of deficits, by borrowing to cover those deficits, etc.  In a household, this would be how much your account is overdrawn, the balance on your credit card to cover things you couldn’t afford but paid for anyway, balance on loans you took out for that same purpose, money you might owe friends and/or family, etc.

Debt ceiling: from investopedia: “The maximum amount of monies the United States can borrow. The debt ceiling was created under the Second Liberty Bond Act of 1917, putting a “ceiling” on the amount of bonds the United States can issue. As of the end of July, 2011 the debt ceiling was set at $14.3 trillion.”  If you think of national debt as credit card debt, this is the federal equivalent of your credit card limit.

A quick note on the debt ceiling: it’s possibly unconstitutional due to section 4 of the 14th amendment.  “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”  So… you can’t limit the debt, you can’t question paying it, if the government owes it, it’s owed.  However, Obama has stated he refuses to invoke that clause to end the debt ceiling battle and ‘avert default’.

However,  not raising the debt ceiling does not mean we will definitely default on our debts.  What it means is, we have to stop borrowing our way out of debt.  We can pay what we owe– 70% of incoming government revenues service our debt (interest and principal).  The government is not going to stop collecting taxes.  What the government will have to stop doing is borrowing money from one source to pay another.  What do us private citizens do when we max out our credit cards, and run out of credit with any other creditors we could turn to?  We start cutting back to the bare necessities, and pay our debts with any money we have left after buying the minimum to get by.  We stop taking vacations every holiday weekend.  We stop buying sirloin steaks, and buy chuck steaks, or even sausage and ramen.  We stop buying new clothes every season.

Yes, this means the government will have to look long and hard at places to cut.  Different types of spending will need to be given different priorities.  You have mandatory spending, and discretionary spending.  Servicing the debt, Medicare,  Social Security, and government pensions are mandatory spending.  Those get higher priority when it comes time to cut back on spending.  Discretionary spending covers defense spending, space exploration, other R&D, the FBI, etc.  Those would get lower priority, and spending in those areas would have to be more careful and efficient.

So, assuming Obama, Reid, and Co. don’t purposely decide to allow the US to default, we’re not going to.  We always have paid our creditors, we always will, we just have to put off ‘shoe shopping’ (figuratively speaking) and vacations (literally and figuratively) until our bills are paid and our debt’s under control.  Just like every household across America does.