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Members of the Obama administration and the Democratic Party urgently have been warning Congress, especially GOP members of the House, that the U.S. debt limit must be raised – and raised soon – to avoid default, the dollar’s collapse and various other catastrophies.
“Failure to raise the limit would precipitate a default by the United States,” threatened Treasury Secretary Timothy Geithner in a recent letter to Congress. “Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.”
“If we didn’t renew the debt ceiling, our soldiers and veterans wouldn’t be paid, Social Security checks wouldn’t go out,” warned Sen. Charles Schumer, D-N.Y., in an appearance on NBC’s “Meet the Press.” “We might permanently threaten confidence of the credit markets in the dollar, which would create a recession worse than the one we have now, or even a depression.”
But a new analysis from J.D. Foster, the Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation, calls that warning alarmism.
“If the federal government runs up against the debt limit, then the Treasury has tools to manage cash flow for a time before severe measures will be necessary to align the federal spending set in law with the receipts available to the Treasury,” Foster wrote in his report, released just days ago.
“Treasury almost certainly will not default on its publicly issued debt. Nor will Congress imperil the standing of U.S. government debt in the credit markets, risking America’s ‘full faith and credit,’ as the president’s chief economic adviser has said,” he said.
At issue is the skyrocketing budget deficit under Barack Obama’s leadership, which is expected to be $1.5 trillion this year. Meanwhile, the national debt is expected to reach its legally allowed maximum of about $14 trillion over the next few months.
The Foster report said that’s because federal spending has increased from $2.3 trillion in 2001 to $3.6 trillion last year, with forecasts for federal spending to be $4.7 trillion by 2020.
The impact on the national debt, the report said, is that “by the end of the decade, it will be nearly 90 percent of our national economy and by 2035, it will be an unsustainable 180 percent.”
“If Congress ultimately inclines toward raising the debt limit, then it could, in the same legislation, impose immediate, substantial spending reductions along with strong new rules such as hard spending caps to require continued, sharp spending reduction in future years,” Foster wrote. “The outcome should reflect a clear, quick path to a sound fiscal policy. Congress should also consider carefully both the size of any increase in the debt limit in light of the other opportunities it will have over the course of the year to reduce spending and the importance of having yet another forcing opportunity if further spending reductions are not forthcoming. The responsibility for driving down spending and borrowing rests – under our Constitution – squarely with the Congress and the president of the United States.
He said if Congress decides against increasing the debt ceiling, there will be “a massive restructuring of federal spending.
That is the goal of a separate campaign that has been launched to encourage majority GOP members of the U.S. House to force the government to live within its income by leaving the debt limit alone.
Joseph Farah, editor and chief executive officer of WND, is the force behind the “No More Red Ink” campaign.
This week, the campaign will ship the first 125,000 “red ink” letters to House Republicans urging them to oppose raising the debt limit when it comes to a vote in the coming weeks.
“Unfortunately, if the House Republicans do not hear from the American people in strength, they will vote for business-as-usual deficit spending for the next two years and surrender the power they have to force fiscal responsibility on Barack Obama and the Democrats in the Senate,” says Farah. “House Speaker John Boehner says he wants to use the debt limit to wrangle concessions out of the Democrats, but when he signals, as he did last weekend, that Congress must raise the debt limit to keep the government solvent, he has already waved the white flag of surrender on the most important vote to be cast in Congress over the next two years.”
The only hope, Farah says, is a major outpouring of protest from tea party activists and true conservatives who recognize that government is way too big and is in desperate need of major cuts just to bring it in line with the Constitution.
That’s where the “No More Red Ink” campaign comes in.
Farah launched the “No More Red Ink” campaign to persuade the House Republican majority to say no to raising the debt limit – the only action, he says, that will force Washington to stop unsustainable spending in the short term.
For his part, Farah has made it easy for the public to make their voices heard in Washington in a powerful way.
The “No More Red Ink” campaign has two facets:
- Sign a petition directed exclusively to all 242 House Republicans calling on them not to bargain away their “nuclear option” that can stop any further deficit spending for the next two years.
- Flood their offices with “red ink” letters that remind them they are holding all the cards in getting government spending under control and that all they have to do is vote “no” on raising the debt limit.
Foster’s report says the “out-of-control” federal spending is the reason for the deficit and debt problems.
“Congress has options, and it has time to consider them carefully. If Congress chooses not to raise the debt ceiling, then it could act swiftly to indicate that net interest is the highest priority to allay any remaining concerns about the possibility of defaulting on the debt. Congress could also declare exactly where spending should be cut to align total spending with receipts, not leaving this to a president acting without statutory guidance,” he said.
“If Congress inclines toward raising the debt limit, then it should also impose immediate, substantial spending reductions along with strong new rules such as hard spending caps to require continued, sharp spending reduction in future years.”
The deliberations, he suggested, “should not be tainted with misplaced concerns over whether the United States government might default on its debt. Contrary to the clear implications of a letter from Treasury Secretary Timothy Geithner to Congress dated January 6, 2011, refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt.”
He continued, “Both immediately and long after it reaches the debt limit, the government would have far more than enough revenue coming in that the Secretary of the Treasury could use to pay interest on the debt. Nor would preserving the current debt limit put at risk the full faith and credit of the United States government, as the president’s chief economic adviser has claimed. The government would continue to pay net interest as it comes due.”
He noted the “federal debt held by the public” was $3.4 trillion in 2001, $4.8 trillion in 2008 and “leapt to $9 trillion by 2010.”
Geithner warned earlier that should Congress not give him what he wants, “Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including: U.S. military salaries and retirement benefits; Social Security and Medicare benefits; veterans’ benefits; federal civil service salaries and retirement benefits; individual and corporate tax refunds; unemployment benefits to states; defense vendor payments; interest and principal payments on Treasury bonds and other securities; student loan payments; Medicaid payments to states; and payments necessary to keep government facilities open.”
But Foster suggested it could be the impetus for improvement.
“A change of course in federal spending is inevitable. … Reaching the debt limit provides the critical moment to force the necessary action to reduce spending and borrowing,” he said.
“The legal prohibition on government’s selling additional debt because government borrowing has reached the statutory limit does not translate into an inability to spend (because tax money is still coming in). Thus, the consequences of reaching the debt limit are quite different from the consequences of a ‘government shutdown’ as a result of the inability of Congress and the president to agree on spending levels for government agencies,” he explained.
“Very simply, reaching the debt limit means that spending is limited by revenue arriving at the Treasury and is guided by prioritization among the government’s obligations. How the government would decide to meet these obligations under the circumstances is a matter of some conjecture. Certainly, vast inflows of federal tax receipts – inflows that are far more than needed to pay monthly interest costs on debt – would continue. Thus, the government has never defaulted on its debt. Whether Treasury is required as a matter of law to prioritize incoming receipts to pay interest costs first is an open question, but there appears to be little doubt Treasury would do so. There is, therefore, no real question that Treasury would take the actions necessary to preserve the full faith and credit of the U.S. government and avoid defaulting on debts due,” the report said.
Foster suggested credit markets may react unfavorably for a short time, but the actual impacts would not be severe.
“If the federal government were forced to operate indefinitely at the current debt limit, the early reaction in credit markets could be unfavorable. Credit markets value certainty and carefully evaluate and price uncertainty. Despite the recent run-up in federal debt and the tremendous difficulties the federal government faces due to promises made in major entitlement programs, U.S. government debt is still the global benchmark for safety. The uncertainty surrounding how the federal government would operate if it were unable to issue debt would likely rattle markets initially, leading to adverse movements in interest rates and the dollar exchange rate,” he wrote.
But, “The news would not be all grim … as the passage of time probably would make clear. As noted, the Treasury Department would surely affirm that all interest payments on government debt would be made, thus reassuring bond holders. While spending cuts required to align total spending with revenues would be deep, triggering a huge political brouhaha, from the credit markets’ perspective the overarching consideration would be that a government previously bent on issuing destabilizing amounts of debt would be running an enforced balanced budget.”
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