The Impact of a Higher National Debt

[Pedro Gonzalez]

The U.S. national debt ceiling was set at $14.29 trillion in February, 2010. Now it looks like we are going to hit that ceiling by the time you read this posting. What our politicians are going to do? Not passing a law to increase that ceiling means to enacting a balanced budget amendment. Not raising the national debt ceiling means deficit spending ends immediately. It means the U.S. government would have to live within its means.

The revenues of the U.S. government come from $2.2 trillion it collects each year in taxes charged to the US Citizens. However, our nation spends $3.5 trillion each year, which creates an annual deficit of $1.3 trillion (deficit). To compensate for the deficit, the U.S. government borrows by selling U.S. Treasury bonds. If Congress refuses to raise the debt ceiling, the U.S. government is not allowed to sell any new bonds except to refinance old ones.

Some politicians believe that not raising the ceiling risks the "full faith and credit" of our nation. Well I do not agree with them on this point. As mentioned before, the United States can sell bonds for the purpose of paying off existing bonds. This is a situation of generating current debt to pay off existing debt. This wont solve the issue of the pending situation of the national debt, but it would address the situation of our credit standing since we would not have to default on any existing debt.

What other effects we would see from not raising the debt ceiling?

---> Hyperinflation and Depression

This means that we have to gradually cut Fed spending by the amount of the deficit over the next twelve months or $1.3 trillion which is $1.3 trillion ÷ $3.5 trillion = 37%.

So we would have to cut federal spending 37% by the end of the twelve months after the ceiling was reached. If we spread this impact evenly, we would see that Social Security and Federal pensions recipients will receive 37% less every month. Our nation would have to lay off 37% of the work force or all of the federal employees would have to accept a 37% cut in their pay. Congresspersons and the president would have to take immediate 37% pay cuts—so would their staffs (I do not think we will see our beloved politicians do this patriotic act).

So what do we do?

Bring unemployment down to 5%? That wont solve the situation, not even close. That would only increase annual tax revenues by about $150 billion. Increase taxes? Nope. Numerous experts like Former Fed Chairman Alan Greenspan have said that. If you could increase taxes 25%, which is probably impossible unless you broadened the base, you would still only get about $500 billion more revenue. Still short. Increase taxes to the current tax base would not only cause a paralysis on an already ill economy.

So what do we do?

Is saving our credit rating in our global economy more important than saving the nation? If the U.S. continued to make on-time payments to bond owners, the "full faith and credit" of the U.S. of course would be kept intact. However the house in falling apart, since we do not have money to address the internal challenges. Do we try to rescue social security and Medicare? If the U.S. government defaults on its obligations, the international bond market will refuse to buy any more U.S. bonds. Also, defaulting on the bond payments would change our credit rating from AAA to defaulted.

This is a mess. Both, republicans and democrats are guilty of this mess. Now is not a time to finger point and provide us with their bull crap answers!

On January 25th, our President Obama, provided us with more of the same in his State of the Union addresses. We're in DEEP trouble and we need to have REAL solutions NOW. How do we address the current situation of our nation. Taxpayers are tired of having to bail out Fannie and Freddie Mac AND Big Banks and the rest of the mess. The CEOs paying themselves big bonuses, while the nation continues to go down in more debt.

I bet that the politicians will conclude in raising the ceiling and print more money. This is an interesting situation, since our politicians will use this moment to get their pet projects approved, instead of focusing on what matters to our whole nation. Ultimately, they will all get together and raise the ceiling with some meaninglessly small cuts. However, we know that the situation is still deteriorating. We all will be here again discussing when we will hit our next debt ceiling.

Imagine, you making your household decisions based on what your neighbors may think about you cutting down your spending.

If we do not seriously address this now, the price to pay will be higher. If you think that a 37% cut now is bad, wait until they postpone this issue for later. The options are not 37% cuts now or more borrowing. It is 37% cuts now or bigger cuts next year or even bigger cuts the year after that, etc. etc. Remember that our deficit, unless we make some drastic changes, will continue to grow. I think we should bite the bullet now and accept the offer of the 37% cut now. However, I do not see them doing it. When they have to choose between personal political suicide or national financial suicide, they will choose national financial suicide. They are not prepared to do what is right for the nation. They are scared!