Raising Debt Ceiling Overlooks Costs, Undermines Future

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Chris Mayer of The Daily Reckoning explains why raising the debt ceiling fails to fix the underlying credit problem in Washington.  His key points:

  • The precise reason why raising the debt ceiling (a common practice in Washington) was so controversial is because the only way for the government to pay its obligations (debt) is for it to take on more debt.

“[R]aising the debt ceiling is not a magic cure-all for America’s debt problems. Raising the ceiling just gives the U.S. Treasury permission to borrow more money. It does that by issuing Treasury bonds and notes — in effect, they take out loans, promising to repay the bondholder the principle plus interest.

Here’s the thing, though — right now, the only way the government can repay its existing debt obligations is to take on more debt!…It’s sort of like using credit cards to pay your mortgage.” 

  • In August alone, the government will need to raise over $650 billion to avoid a shutdown – $500 billion to pay bond holders for matured U.S. Treasuries and another $159 billion to cover the expected monthly deficit.
  • Over the next four years, the government will need to pay bond holders over $3 trillion from additional matured securities.
  • The essential worry in Washington was that failing to raise the debt ceiling would impede the government’s ability to continue “rolling over” its debt (taking out debt to pay for debt).  The implication for the debt-ceiling issue is not cutting government spending in the future, but figuring out how to pay for programs already committed to such as entitlements.
  • A default would surely have resulted in a credit downgrade for the U.S., causing interest rates on U.S. Treasuries to increase.  This worry still persists among investors, so even in the absence of a credit downgrade, major holders of U.S. debt such as China and Japan may demand higher yields on their investment, which means higher borrowing costs for the U.S.

“[A]s more investors worry about America’s financial health, they will need more incentive to buy its notes and bonds. Convincing them to take on the risk will require a higher interest rate.”

  • Higher borrowing costs for the U.S. government will ripple out into the economy, making borrowing costs for everyone increase, impeding lending, job creation, and any chance at a recovery.

“Higher Treasury rates will create a ripple effect, forcing other interest rates up, too. Suddenly, the cost of borrowing money goes higher for everyone, which will encourage more saving than spending.”

The full article can be found here.

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About Jeremiah Dow
I have a B.S. in Politics, Philosophy, and Economics with a minor in Economics. I finished school in 2010 and am currently working on independent research in various areas including political and economic philosophy, government, and history. I am also currently looking for work in research, particularly the social sciences dealing with public policy work. I aspire to a top-level graduate institution, but would first prefer some professional research experience. Some of my primary influences are Ayn Rand, Noam Chomsky, and Howard Zinn among others.

6 Responses to Raising Debt Ceiling Overlooks Costs, Undermines Future

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