What Is This Debt Ceiling Anyway?


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As we reviewed in my editorial on sequestration, the United States and Denmark are the only two democratic nations in the world that cap their national debt in a process that is legislatively separate from the drafting of the budget itself (and the Danish version is just for show anyway). So why do we continually battle with this arbitrary limit? Every other country in the world seems to have been operating all this time without a debt ceiling, so why do we need one?

 

As most people who have credit cards or loans know, borrowing money has a price. Just like you have to pay interest on your car loan, mortgage, and credit card balances, the Government must pay interest on its outstanding debts. So far in the fiscal year of 2013 (which started in October), the Government has paid $151,544,895,513.35 in interest on its roughly $16 trillion in outstanding liabilities. Right now, T-Bills are paying roughly 3.2% interest. This is a historic low, considering that the rates were 14% in 1980 and 6.5% as recently as 2001. According to President Obama’s requested budget, the Government is projecting roughly $2.9 trillion in tax revenues. At current interest rates this would support a total national debt of roughly $90 trillion, assuming no money was spent on anything else. At 1980-esque interest levels, we would top out at just $20 trillion – unsettlingly close to the current debt load.

 

Of course, all of these figures assume the Government were spending money on nothing but interest payments. In reality, there are things we as a country need to pay for in addition to interest – defense, infrastructure, and entitlements. Whether you agree or disagree, entitlement spending is still listed as “mandatory spending” on the US budget.  Every dollar spent on interest effectively reduces the national tax revenue. In 2013, this is expected to total $246 billion. However, as we have seen, this is based entirely on the interest rates paid to citizens (both foreign and domestic) and foreign governments. Since this rate is based on many factors, including the global economy and the country’s credit rating, it has the potential to change without the approval of the Government.

What happened in 2009 to home owners with adjustable-rate mortgages? Have we forgotten already?