Why Won't This Debt Idea Work?

http://www.freerepublic.com ^ | 7/14/2011 | bolobaby

[bolobaby]

Victory in the debt ceiling battle seems so simple to me. Can someone tell me where I'm wrong?

Here's my idea:

1) Immediately draft a short, simple bill that states "In the event that the United States debt limit is reached, the treasury's first obligation is to use incoming revenue to pay our existing debt obligations." (That is, the interest on the existing debt.)

Since it's a spending bill, it should be presented in the House. Since our continuous federal revenue greatly exceeds our interest obligations, a bill like this would ensure that we could not default. If it passes Congress, would the President be stupid enough to veto it - basically announcing to the world that he intends to default? If it did pass, it would take the "world crisis" and "default" question off the table. If it didn't pass, it would be the most tremendous tool to use against any democrats who voted against it. After all, they would be signalling to the world that they want to destroy our credit rating.

2) Draft and present another bill that names Social Security as the second priority item that *must* be paid.

While I am all for Social Security reform, I think this bill would be smart since SS withholdings are not supposed to be part of the general fund. Supposedly, SS is running a "surplus." Basically, the SS withholdings exceed the current SSN outlays. Then Congress raids that money to pay ACORN, Planned Parenthood, and other BS.

BUT, if this bill was presented, it's another no-win situation for the democrats. If it passes, the "Grandma" tactic is off the table. If it doesn't pass, it's the greatest political weapon against democratic opponents. Plus, it only reinforces what those funds are supposed to be for *anyway*, so I think we should single it out.

(There may be logic to ensuring soldier's paychecks also get paid - not the entire defense budget, mind you, but the paychecks. I'm not presenting that here because I'm trying to keep this simple.)

With these two bills, Republicans could just let the debt reach it's limit and do nothing. At that point, the president is forced to shut down other functions of gubbermint, but the two "crisis" items are off the table. By strategically choosing which parts of gubbermint shut down, Obama could cause a crisis, but it would also force him to play his hand.

Imagine, for example, if he decided to withhold soldiers' paychecks. Now imagine if he withheld their paychecks but Congress and the White House staff still got paid! Ooooh.

[jjsheridan5]

But aren’t you ignoring that if you pay off the principle with newly issued bonds, your debt has not risen? In this respect, it is like paying off one credit card with another. The total debt doesn’t change. Obviously, there is a very brief period in time where your debt does increase, in the credit card case, because the transactions are not instantaneous.

You mentioned the principle of 1000$ needing to be paid. But if we borrow 1000$, and use that to pay the principle, our debt doesn’t increase, thus no default.

Obviously, this gets into the question of exactly how the debt ceiling law was written. But it would be poorly written if it didn’t take this into account.

What is more, isn’t it an issue of when exactly that debt is rolled over (within the month)? If they are reasonably well staggered, and the new issuances never breach the debt ceiling, then even this time gap between paying the principle, and selling new bonds, doesn’t seem to even be an issue.

[bolobaby]

Exactly. I’m trying to find the actual debt ceiling law, but am about to give up and go to bed.

My bet is that it’s not so precise. I’m certain that our government could very easily play this shell game without running afoul of the law.

And even if they did, they wouldn’t give a crap. We’re talking about an organization that LOVES funny accounting.

So it’s a winner and Jack Black is wrong. ;-P

[Tennessean4Bush]

GDP = C + I + G + NE

where C is consumption, I is investment, G is government spending, and NE is net exports.

Cut spending by 40% and GDP declines sharply. If you like the present recession, you'll just love the greater depression.

If you cut government spending by 40%, consumption will increase dramatically since people will worry less about the future financial picture, private investment will soar for the same reason and because they will know their taxes won't be raised, and exports will eventually increase due to more investment but decrease also due to less downward pressure on dollar.

[justa-hairyape]

Their massive cash infusions have done little to the overall economy. Why would any cash defusions ? People are hunkered down right now. What DC does matters little. IMHO. The Globalists on the other hand, will lose some of their shirts, which is why all their sycophants in the MSM are ranting and raving..

[Jack Black]

That won’t work because you’ve spent the principle already. This is what it means to be a deficit economy. You don’t have the money to pay the principle. You have ZERO dollars in you bank. How do you pay the note? You can’t. The USA is BROKE. We live on debt. We have no money in our bank account. You are suggesting we can use check kiting to cover our debts. That’s absurd. Our creditors are not morons. They are very smart German, Japanese, Taiwanese and Chinese people. They are not going to take rubber checks.

All the people calling for not increasing the debt limits are completely warped and stupid. We will be viewed as the equivelent of Argentina. And we will deserve it.

Mitch McConnell is the only person with a brain in the GOP. Thank god he is the head of the Senate.

I love Michele Bachmann, but she and all the other Tea Party Patriots are DEAD WRONG on this issue. We must raise the debt ceiling.

What does being a Conservative mean if not that you pay your debts?

[bolobaby]

Uh... please explain to me how increasing the debt limit is NOT check kiting, but this is...?

(I’ll help you - you can’t. They’re both forms of check kiting except at the end of the day my form results in no net increase to debt and yours does.)

[dr_lew]

Are we already over the cliff? I’ve actually seen the printed statement that we have to raise the debt limit, otherwise the government can’t borrow the money it needs to pay its bills. It seems to me a short step to s/bills/interest/ ... then what? BANG! ZOOM! To the moon Alice!

[cableguymn]

seems simple to me. Credit card limit is 1000 bucks. Interest is 10 bucks. I make the min payment of 50 dollars (this would be retiring old debt AND paying interest) this would leave 40 dollars open for NEW debt to be taken on.

It’s not a zero game. The debt ceiling is no different than the limit on a credit card. If they pay off a bond at it’s maturity date. They can simply sell a NEW bond because the debt was lowered by the bond the just paid off (less any interest paid at the time of pay off) and still remain under the debt ceiling.

There is a TON of departments that could be closed that no one would miss and many more that SHOULD be closed that only environmental nut jobs and socialists would miss.

Start cutting or crash it. Just get it over with so we can move on.

[jjsheridan5]

You don’t have the money to pay the principle. You have ZERO dollars in you bank. How do you pay the note? You can’t... You are suggesting we can use check kiting to cover our debts.

How is rolling over the debt "check kiting"? If it is, then we have been kiting checks for a very long time. This is merely a question of the debt ceiling, not whether we pay off our debts.

And, as I stated earlier, if the debt is even reasonably staggered, we don't even run into the issue of temporarily exceeding the debt ceiling due to the non-instantaneous nature of the transfers.

And where do you get "rubber checks" from? The money we pay back the principle with is no different whatsoever from money we have been paying back the principle with, for years. We have been borrowing money to repay principle for a long time. Are you seriously meaning that our checks will bounce? That is what a rubber check is, after all. I see no reason at all that they would, any more than any of our previous checks have bounced.

The debt ceiling is an arbitrary number that has no bearing on rolling over our debt. If people view us as AAA one day, and Argentina the next, because we are imposing some kind of fiscal discipline, then they are morons. But they aren't, and they will recognize that the US is no closer to default than before, and may actually be further, simply because we are at least starting to impose this fiscal discipline.

It is the McConnells of the world (if he is not playing some kind of rope-a-dope), that will lead us to Argentina-ville. We must NOT raise the debt ceiling, if we want to avoid that fate.

[Jack Black]

You mentioned the principle of $1000 needing to be paid. But if we borrow $1000, and use that to pay the principle, our debt doesn’t increase, thus no default.

You want to run the US FedGov like a in debt American runs their house, using one credit cart to pay another. Leaving aside how pathetic that is, ok, let's see if it works.

You say "if we borrow $1000". But we can't. The debt ceiling is reached. You want to pay the VISA bill with the Mastercard. But the Mastercard has a $10,000 limit and you've hit it!

To pay the VISA card with the Mastercard you must raise your limit on the Mastercard. The GOP won't let that happen. That's what the argument is about. So - no credit increase = no ability to pay VISA card = DEFAULT.

That is exactly where we are as a nation. The only way to stay above water is to incease the Mastercard limit. Failing to do so means we will miss payments and our credit rating will suffer.

There are only two reasons to support that.

1. You are not that bright and you are listening to the idiotic ramblings of all the "conservative" pundits and many conservative politicians saying "it doesn't matter".

As I have shown above this is FALSE.

2. You don't care. You hate the entire FedGov so much you WANT to see it fail. Including Social Security, Medicare adn basically the whole thing.

People in category #2 I sympathize with, but disagree with. These things never turn out well. Newt tried to shut down FedGov and Clinton got a second term. If you don't "kill the king" -- that is cause all of FedGov to fail you will end up worse off than you are now.

People in category #1 are stupid. You don't know what the hell you are talking about. It's exasperating that so many people live in the conservative Talk Radio echo chamber.

Honestly. Do you really think Sean Hannity understands how bonds work? NO! He does not. Even Hugh Hewitt (a Harvard grad and law school professor) has shown himself to be way over his head on this.

No debt ceiling increase = not enough money to roll over debt coming due in August = Default of USA = Argentina 2000.

Come on people. Grow up and act like the mature conservative we are supposed to be. Yes, FedGov is too big. But the solution is not cratering our credit, causing our cost of funds to triple, and destabilizing the world financial system.

I hate FedGov no less than anyone here. But I like being able to buy gasoline. Screw this up and we won't be able to buy it - the Saudi's will reject our failed currency.

Come on guys, grow up. We took 50 years to get here and we can't get out of it in ten minutes. All you Freeper Vets: ready to get NO PENSION next month? We are $300 Billion short of what we nee to roll over debt: EVEN IF WE DEVOTE 100% of FedGov income to debt in August of 2011.

We are hosed, but this is not a rational response.

[jjsheridan5]

I cannot help but notice that you throw in a lot of condescension towards others, yet seem unwilling to address any of the actual issues raised. How is rolling over the debt any different now, from last month, or last year, or the last decade? The principle you pay off is paid off. Yes, you have now borrowed more money, but you have cleared the same amount off of your existing debt.

The analogy to a credit card, you either purposely distorted, or did not understand. If you have a $1000 balance on your Visa, and no balance on your Mastercard, and are required to pay your Visa off (the equivalent of paying the principle), and you use your Mastercard to pay the Visa, then your total debt remains $1000. Your Visa has a balance of 0, and your Mastercard a balance of $1000.

Your response had nothing to do with the issues raised, and seemed more interested in casting aspersions on others. Assume I am not very bright, since that was one of the scenarios you raised. How is the debt ceiling breached if you are clearing old debt with the same amount of new debt?

[Jack Black]

Sure, I will explain how what I am suggesting isn't check kiting and what you are suggesting is.

If I have a $10,000 limit on my Mastercard and no money and I need to pay the Visa bill and I write a check on the Mastercard account for $500 to cover my monthly Visa bill I'm kiting a check. I have written a check that is bogus. It will bounce.

If I call Mastercard and ask them to raise my credit limit and they raise it to $12,000 and I write the same $500 check it is not bogus. It will not bounce. There is some potential for me to make everyone whole in the end.

Many of us have gotten into hard times and used credit to pay credit. We've felt horrible about it, but we've pulled it off - payed our bills, payed down the principle, gotten out of trouble and not ruined our credit ratings.

As a family we would always take that option over default / bankruptcy, and so should the USA.

[Jack Black]

I'm sorry if I seem condescending. I apologize. I'm frustrated by the poor anaologies and explanations I have been listening to for a week.

You must view this situation from the point of view of the creditor, not the borrower.

If you, Mr. USA, have promised to pay me 3% for two years on a T-bill and the two years is up and you owe me one final payment of $75 and my $1000 principle back and you tell me: SORRY - I won't pay you your principle because Ron Paul won't authorize more borrowing to cover it -- you have DEFAULTED.

As a borrower you are scum. You are Argentina. Or Zimbabwe.

In contrast if you go back to your large group of friends and say "I need $1000 to pay Jack Black the money I promised to return to him on Aug 15" and the lend it to you, and you pay me back -- we're cool.

I might think "gee, Jack seems over his head. I heard he had to borrow money from Ty to pay me back. I might not lend him more in the future... "

But I won't think: "That butt-tard Jack Black. He owes me $1000 and didn't pay me a penny back siting some BS about his wife not letting him borrow money from his friends anymore. Screw that asshat. I'm never lending him a dime as long as I live".

Get it?

[Jack Black]

And, as I stated earlier, if the debt is even reasonably staggered, we don't even run into the issue of temporarily exceeding the debt ceiling due to the non-instantaneous nature of the transfers.

The debt is not "reasonably staggered". We have $474B to pay from Aug 3-31. We have about $175B in income coming in. We have NO savings. It will be day to day, and early in the month we we default.

These are not trivial sums. There is no provision in international banking or the bond market for "letting it slide a little bit". It's not a nice local credit union that can give you a few days grace period because you've had an account there for 20 years and they know you'll make it up.

You fail, you FAIL.

[jjsheridan5]

Apology accepted, and no problem, it's late.

My understanding of the debt ceiling law is not that we cannot borrow more money, just that the amount we borrow cannot exceed the amount of debt we remove from the system. Unless this is mistaken, then there is no reason we cannot pay back the principle, with newly borrowed money, and not breach the debt ceiling.

Unless this interpretation of the debt ceiling law is wrong (and I doubt it very, very much, since no one is talking about us no longer issuing debt), then it is a mathematical truism that keeping the debt ceiling where it is does not mean default.

We borrow what we have to (combined with tax receipts) to pay back all principle owed this month, plus social security, veterans benefits, and most of the rest of our outstanding costs, and so long as the amount we borrow doesn't exceed the principle we pay back, then we have defaulted on no-one, the seniors and veterans keep getting their checks, and life goes on (albeit with forced cutbacks elsewhere in government spending).

Viewing it as a creditor, I am happy because I get paid back, and I feel more comfortable lending to that country in the future, because they are obviously serious about getting their fiscal house in order. Obviously, if we default, then that would be a game changer, but there is no reason at all that we would default, even if we leave the debt ceiling where it is.

[jjsheridan5]

You fail, you FAIL.

I take it your apology about being condescending was short-lived. The point about reasonably staggered was because the transactions are not instantaneous (we pay back principle with borrowed money, thus causing a very short period where our debt does increase -- although this is, more than anything else, just a question over the specific wording of the debt ceiling law). It has no bearing on our credit worthiness, it only may have a bearing on the debt ceiling law, if that law was poorly written.

I am just curious, you say we have "no savings". Am I to take from this that you were under the impression that, up until now, we have been paying back principle with savings? We have actually been rolling over debt for a very long time, since we have been running deficits for a very long time.

[John Semmens]

This analysis is incorrect.

Replacing maturing bonds with new bonds one-for-one can be done within the debt ceiling limit. What can’t be done is funding new spending with new bonds.

Default would only occur if the Obama Administration chooses to use revenues and borrowing for additional spending rather than debt service.

[John Semmens]

Clear and succinct, but erroneous.