I truly don’t think most people understand what the connection is between the Treasury, issuing Bonds and T Bills for sale as IOU’s (with interest to be paid at a later date) – AND – how that is connected to the US debt ceiling, the federal deficit, the global economy, and your own financial situation.
Yes, it is a complicated equation, but all of these things are connected.
When the government spends more than they take in from taxes, and other revenue – the left over amount is the deficit. Year after year the deficit has accumulated to be a really big amount. That is called the debt ceiling.
The United States, and just one other country in the world, have a debt ceiling in place to control the balance between what the government spends and what the government takes in – on an accumulated (year after year) basis.
Luckily for us, the US Federal government allows their Treasury department to issue paper (that investors will purchase), and over many years, this has become the safest investment in the entire world that can be bought. (it has always been paid back with interest)
This paper in the form of bonds and bills, is like getting a loan to pay for that deficit spending. But, can only be issued up to the agreed upon debt ceiling. Once that is reached, No more borrowing by issuing paper. No more spending – because there is not enough revenue to support it.
The spending can be separated into 3 groups – Mandatory that is spending created by passing laws or acts. Discretionary group spending is to pay for things not dictated by law, but more driven by philosophy. The 3rd group of spending is the Interest on those loans that they agreed to pay back.
The chart above, shows what kinds of things are included in the 3 groups.
When politicians argue about spending, it is supposed to occur during the budget process – not during the debt ceiling discussion. That’s like arguing about closing the barn door after the animals had all escaped.
When politicians argue about cutting the deficit by reducing spending – some focus on the group of things included in Mandatory – while some focus on the things in the Discretionary group.
The deficit can also be reduced by raising revenue (taxes), but neither party would ever agree to increasing taxes on their electors or benefactors. Republicans won’t tax the rich, but have no problem taxing the rest. Democrats only want to tax the wealthy and corporations.
Regardless of where they think the increased revenue comes from, equation doesn’t change.
The best and most amazing part of this situation is that until now, and since WW2 – the US dollar is the strongest currency in the entire world. The US treasury has had no problems ever selling that paper which they issue to cover that deficit.
So, even though $31.4 trillion (current debt ceiling) is a amazing amount, so is the trillions in Bonds and T Bills people around the world have purchased (as the safest investment) and almost guaranteed to be paid back (with interest).
The damage associated with defaulting on the promise of paying that back, would be enormous. The impact to future borrowing might be even more troublesome. People around the world would be cheated and the future reputation of the US dollar as a safe investment would forever be gone.
Politicians for the most part do not understand the financial world, economics, or much about money – other than what they can get as pork barrel spending or campaign donations.
The average American is not informed, nor do they care to find out about this stuff.
Few try to compare how an individual would operate, or how a company operates, or even how a state can budget operations. Most don’t understand that none of those is the same as how the Federal government is allowed to do things.
The federal government is the only one of those entities that can generate/issue money (backed by their Treasury Department).
Since the current debt limit includes spending already voted on and passed into law, those promises should be kept as they were agreed to.
Discretionary spending could be given a deep dive to determine which programs that are negotiated for and against mainly by political philosophy might be able to be reduced. But, do that during the budget process, not now.
It’s like agreeing over which groceries you want to return to the store because you suddenly don’t think you can afford them. You say bring back the kids cereal, she says bring back the steak and lobster. Nobody wins, and why did you buy that stuff if you couldn’t afford it in the first place?
That is also called compromise. Something too many in Congress don’t seem to know what it means. Too many have a “my way or the highway, all or nothing” attitude about everything (including things they have no idea about).
If change is wanted, politicians should consider this idea.
Any law written that is included in either Mandatory or Discretionary spending group, must include “where the revenue is to come from to pay for it”, BEFOREHAND (and as part of – the law being voted on).
The same goes for any spending requests coming from the Executive branch and driven through Congress by the supporting political party.
Doing it at the time it is voted on, eliminates the kind of political non-sense currently happening.
Deal with the projected deficit at the time the excess spending is being voted on.
Don’t pass acts or laws with open ended funding. If the law drives the deficit past the ceiling, perhaps it shouldn’t be enacted.
If pushing tax cuts through (regardless of for whom) ends up increasing the deficit – don’t allow that, unless it includes enacting where revenue will be generated from of an equal amount – as revenue replacement.
Spending must consider the debt limit WHEN it is being budgeted, NOT afterwards while dealing with increasing the debt ceiling. That is simply irresponsible behavior by Congress.
In the mean time, approve a debt ceiling increase. Fix the deficit spending problem separately, and do not default on the agreements made to those that believed and trusted in our leadership.