I can't remember ever seeing a dysfunctional government that is willing to go into default, just to prove an ideological point. I have never witnessed a political argument in a public establishment but even that is no longer so. After a doctor's appointment, my wife and I went to Ramsey's for breakfast. About four tables down, four elderly gentlemen were arguing about the debt crisis using their outside voices. It was obvious that confusion was the main reason for their heated argument.
My wife is not interested in politics or financial matters; unless you call purse sales a financial matter. When we got home, she asked me what this crisis was all about, so I explained what I knew.
I told her that passing the debt limit is just a request of Congress to ensure our creditors that our government will pay the bills we have incurred. It's usually a one-page document passed by both houses, with no stipulations attached, and the president signs it, and we are set to go but we need to borrow more money to pay our bills. In the month of August, the government will collect $172.4 billion in revenues, but it has $306.7 billion of debt. This time, our debt is so huge that it was decided that some spending cuts and revenues were needed to show that we're serious about getting our fiscal house in order. It quickly became a partisan food fight, and revenues were taken off the table. I didn't get into the blame game because I wanted to emphasize how serious this situation is.
There is a 72% chance that our debt ceiling bill will be passed, but if we were to default, our bills would have to be prioritized by the treasury secretary. At this moment the president is urging the senate to come up with a bill since they are not that far apart.
It is likely that these agencies would get paid.
- The interest on the debt ($29 billion) would get paid, so technically we would not be in default.
- Social Security, Medicare, and Medicaid benefits.
- Defense vendors and unemployment compensation
The total for that would be $174.7 billion.
Who might not get paid?
- Military pay, VA benefits. Federal salaries
- IRS refunds
- Departments of Energy, Labor, Health and Human services, the justice department, Small Business Administration,HUD, and the EPA
Since our government wouldn't be able to borrow, the $134 billion needed to pay for those services, it would have to be taken directly out of our sluggish economy with spending cuts, possibly throwing us back into a recession with higher interest rates, more layoffs, and even less consumer spending.
Consumer spending for the quarter only came up 0.1%. We still have a demand problem. What is not being talked about is the run on the banks because I heard this morning that people have already pulled out $60 billion out of their money-market fund. Revised numbers have put our growth at 1.3% instead of the 1.8% that was reported.
I think that since we are in uncharted waters anyway, President Obama should just raise the debt limit citing the 14th amendment. Of course, it will be challenged, and the Supreme Court would likely rule on it right away, but it's worth the risk. This is a crisis, so the president has some discretion because we're dealing with people that think that tax increases SHOULD NEVER be on the table. The republican leadership cannot control these people, so I don't see another solution. I do know that Speaker Boehner, Minority Leader Mitch McConnell, Majority Leader Harry Reid, House Minority leader Nancy Pelosi and president Obama do not want this nation to default. It would be an international embarrassment to see our credit rating dropped because of this foolishness.
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