Borrowing from the future to fund today
This august gentleman is William Gibbs McAdoo, the Secretary of the Treasury in 1917 when Congress passed the Second Liberty Bond Act and set the first statutory limit on the public debt of the United States. Now the current Secretary of the Treasury, Timothy Geithner, is struggling with the Congress to raise the debt limit for the 11th time since 2001.
A debt limit applies to debt that is authorized but not yet issued. Debt limits are imposed for personal credit cards, home equity lines of credit, commercial loan covenants and the debt of public entities.
Here is data for the public debt of the state of California as of April 1, 2011:
|Total General Obligation bonds authorized||$ 150 billion|
|Long term bonds outstanding||$ 79 billion|
|Long term bonds unissued||$ 38 billion|
|California gross state product||$ 1.85 trillion|
And here is data for the public debt authorized and issued by the federal government. I’m sure you notice an obvious limitation:
|Total US debt authorized||$ 14.3 trillion|
|US debt outstanding||$ 14.3 trillion|
|US debt unissued||$ None|
|US gross domestic product||$ 14.7 trillion|
Our economy remains quite weak and some believe that the federal government must continue to spend more than we take in to keep the economy from stalling completely. This shortfall is borrowed from the bond markets.
Others feel that the debt limit should not be raised and that borrowing from the future to fund the present must end. The confluence of politics, financial markets and economics is called “political economy,” and our political economy is bubbling with uncertainty now.
Here’s a scorecard of the players in the debt ceiling puzzle and their positions:
- President Obama and Treasury Secretary Geithner want to raise the debt limit
- Congressional Democrats want to raise the debt limit
- Congressional Republicans want a combination of raising the debt limit and cutting cuts
- The American people, generally, want to raise the debt limit
- The bond markets want the limit raised
To get the ceiling raised the Republicans must be brought to the table. If they require cuts in spending here is the federal government’s budget for 2011:
|Medicare||$ 712 billion|
|Social security||$ 710 billion|
|Defense and war||$ 697 billion|
|Other social programs||$ 427 billion|
|Net interest on the debt||$ 207 billion|
|Federal employee pensions||$ 207 billion|
|Total||$ 3.5 trillion|
The Republicans are looking for substantial reductions in spending so the fights in Congress will likely be tough.
The most helpful way of quickly visually the components of our federal budget and debt is this excellent “debt clock.” Be prepared though for a shock when you look at it because you and every American taxpayer are on the hook for $129,000 of federal debt at of the time of this blog post.
Solving America’s debt mess will take decades. The scale of America’s fiscal challenge actually makes muniland’s problems look simple in comparison. America, buckle up.