Friday, May 6, 2011

Beyond the Headlines: Understanding the Debt Ceiling

BankRupting America: For years, the government has spent far more than it can afford. This history of overspending has left the country with a massive debt burden. But this debt is subject to a limit mandated by Congress. When the debt nears the limit, Congress usually raises it to allow the government to continue borrowing money. But as the government spends at an ever increasing pace, Congress has had to raise the limit with increasing frequency.

As we once again near the debt ceiling, what’s at stake? We go beyond the headlines for all the facts you’re not hearing. Watch the video below.

For more information on the facts in the video, see the fact sheet below.
RAISING THE FEDERAL DEBT CEILING
Washington is a buzz about our nation’s heavy debt burden and the impending debate regarding the debt ceiling. Many in Washington insist that the debt limit must be raised, or the United States will default and send our economy into a downward spiral. But are these predictions based on facts?

WILL WASHINGTON DEFAULT?
History
The debt ceiling, which is the legal limit on borrowing by the federal government, was created to control and limit Washington’s spending and debt. It hasn’t worked.

Since 1940, lawmakers have increased the debt ceiling 100 times (i). And as spending exploded over the last decade, the ceiling has been raised 10 times (ii).

This overspending has saddled taxpayers with a debt of more than $14 trillion (iii), which is nearly the size of our entire economy.

Will Washington Default if We Do Not Raise the Debt Limit?
Yes and no. Washington could actually hold off on raising the debt ceiling for months (iv), before default or being unable to repay our lenders becomes a serious risk. Like a person with credit card debt, our government won’t default on its debt so long as it can continue to pay the interest payments on that debt.

And the US’s $2.2 trillion in tax revenue more than covers the $200 billion in interest owed this year. If Washington had to, they could pay for all of its bills for months by doing things like selling unused assets, shifting cash around and borrowing money from the Fed that doesn’t count toward the debt ceiling.

The Real Risk
But, that’s only a band-aid to buy us time for real reform — and it hides the real problem. Revenue still only covers 60 percent of the total bill. Unless spending is cut, we risk defaulting under an excessive debt burden.

The debt ceiling keeps increasing because of years of government overspending. Spending has increased well above its healthy historic average and, without reform, will shoot up dramatically (v).

If we really want to prevent more debt ceiling increases and defaulting on our debt, Washington should worry less about whether we have to raise the ceiling in the next few weeks
Sources:
(i) The Atlantic: The US Debt Ceiling, A Historical Look. April 29, 2011
(ii) The Fiscal Times: Words Fly as Debt Ceiling Closes in on Ryan, GOP. January 6, 2011
(iii) Department of Treasury: Debt to the Penny. April 29, 2011
(iv) The Wall Street Journal: Congress Has Time and Options on Debt Limit. February 2, 2011
(v) The President’s FY12 Budget

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