FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 20, 2012

IN THIS ISSUE:

1.  What is the Debt Limit & Why Do We Have It?

2.  What Happens if We Don’t Raise the Debt Ceiling?

3.  Is It Time to Abolish the Debt Ceiling?

4.  Two Critical, Unnerving Battles Lie Ahead

5.  Deficit Tops $1 Trillion For 4^th Straight Year

6.  Wishing You All A HAPPY THANKSGIVING!

Overview

Last week I discussed the “fiscal cliff” and the political battle that entails. If lawmakers can’t come together for a solution before the end of the year, the economy is almost certainly headed for a recession or worse in 2013 and beyond.

But there’s a potentially even bigger battle coming up in the next couple of months. We will hit the debt ceiling/limit just ahead. We all saw what a political nightmare that was in the summer of 2011 when Democrats, Republicans and President Obama were deadlocked and the US credit rating was downgraded for the first time ever.

Well, get ready for the next battle once the fiscal cliff is dealt with (assuming it is). That’s what we’ll discuss today. What’s most interesting this time around is that the Obama administration is pushing for Congress to repeal the debt ceiling limit altogether. Just get rid of it once and for all, they argue.

Most conservatives will be outraged when they learn that Obama wants to abolish the debt ceiling, and I might agree. On the other hand, Congress has repeatedly raised the debt ceiling for decades, no matter which party was in power, so it might finally be time to seriously discuss some other alternative.

Following that discussion, we’ll look at the latest budget deficit numbers for fiscal year 2012 that the CBO released last week. For the fourth consecutive year, the budget deficit topped $1 trillion. The national debt is now a staggering $16.2 trillion.

What is the Debt Limit & Why Do We Have It?

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that both parties have made in the past.

Prior to 1917, Congress directly authorized the amount of each borrowing requested by the Treasury. In 1917, in order to provide more flexibility to finance the US involvement in World War I, Congress instituted the concept of a “debt ceiling.” Since then, the Treasury may borrow any amount needed without congressional authority, as long as it keeps the total at or below the authorized limit. Some small special classes of debt are not included in this total.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.

The current debt ceiling is $16.394 trillion. The current national debt subject to that limit was $16.209 trillion on November 13 according to the Treasury Department (see chart below). Technically, market analysts expect the debt limit to actually be reached by December 31. But they predict that the Treasury Department will implement special maneuvers to allow the government to borrow beyond the debt limit temporarily to continue operating safely until late January or February.

What Happens if We Don’t Raise the Debt Ceiling?

Obviously, if we do not raise the debt ceiling, the US government would essentially shut down. In addition, it may also default on some of its outstanding Treasury debt. That would be a disaster! Failure to raise the debt limit in time to prevent a default would not only create fiscal havoc internally, it could trigger an unraveling of the world’s confidence in the US dollar and its Treasury securities.

Because the dollar is the world’s preferred reserve currency, the “dollar economy” currently extends far beyond US borders. If worldwide confidence in the dollar began to erode, foreign countries’ desires to roll their maturing US debt securities into new ones would erode as well, which would only compound the negative consequences for our economy.

Given the catastrophic consequences of not raising the debt ceiling, why then has it become such a political battle to do so in recent years? The reason is not grounded in economics, finance, or sound logic. The reason is politics. For at least two decades, the party out of power (ie - not in control of the White House) has been willing to use the debt ceiling as a political weapon.

Congressional opponents of the White House have used the debt limit as leverage against President Obama and our two previous presidents, Bush and Clinton. For example, in 2006, during Bush’s second term, then-Senator Obama voted against raising the ceiling (a decision he now says he regrets).

There is little doubt that we will have another dangerous fight in Congress when the debt limit must be raised again, most likely soon after the new Congress is sworn in during the first week of January. Once again, the threat of default will almost certainly create chaos in the markets early next year, even though everyone is confident that a deal will be done in the end.

The Debt Ceiling – Is It Time to Abolish It?

As discussed above, the debt ceiling was never designed to prevent the government from spending too much money (unfortunately). As also noted above, the debt ceiling is only increased to cover already existing federal obligations, not new ones. Since increasing the debt limit has become such a political weapon that drags the country to the threshold of default each time it happens, perhaps it’s time to admit that the debt ceiling has become obsolete.

Some have recommended that the debt ceiling be changed so that it is automatically increased as a percent of GDP. The problem with that approach is that the debt ceiling could go down during economic slowdowns. Don’t expect Congress to consider that seriously anytime soon. Others have suggested raising the debt ceiling enough to cover expected obligations for multiple years in advance. That idea is also not getting much traction.

Treasury Secretary Tim Geithner raised some eyebrows recently by openly arguing that the debt ceiling should be abolished in the upcoming Lame Duck Congress. On November 13 at the Wall Street Journal’s CEO Council gathering, Geithner argued that it is time to jettison the US debt limit. In an interview on Bloomberg TV late last week, Geithner said the US should “absolutely” get rid of the debt ceiling, “the sooner the better.” Geithner is stepping down from the Treasury in January.

Calls to get rid of the debt limit should not come as a surprise from an administration that took the national debt from just over $10 trillion to $16+ trillion in less than four years. President Obama would love to abolish the debt ceiling. It remains to be seen if the president intends to use the debt ceiling as leverage in the just begun fiscal cliff negotiations.

Secretary Geithner also confirmed that the Treasury can employ a number of “extraordinary measures” to continue borrowing after the debt limit is reached until sometime early next year. These same measures were also used the last time the debt ceiling was raised to a new high of $16.394 from $15.194 trillion set in September 2011.

Two Critical, Unnerving Battles Lie Ahead

As I discussed last week, lawmakers face tough negotiations over the fiscal cliff. President Obama and Democrats want to increase income tax rates on the highest earners. Republicans prefer to look at closing loopholes and eliminating deductions and tax credits.

The president and congressional leaders held their initial meeting on the fiscal cliff last Friday at the White House, and it reportedly went well (the first ones usually do). The Republicans admitted publicly that revenues have to go up. At the Republicans’ request, Mr. Obama reportedly agreed that entitlement reform must also be part of a new deal.

House Speaker Boehner believes that the negotiations should include both the fiscal cliff and the debt ceiling. My guess is that he won’t get that wish and the debt ceiling fight will be pushed into next year. But as noted earlier, I fully expect Obama to make a push at some point to simply abolish the debt ceiling altogether.

Whether the fiscal cliff and the debt ceiling are negotiated separately or simultaneously remains to be seen. Either way, I expect the negotiations will turn ugly quickly. As I mentioned last week, the president thinks his comfortable re-election gave him a “mandate.” The Republicans in the House think it did not.

And remember that Obama vowed (before the election) to VETO any fiscal cliff deal that does not include raising income tax rates on individuals making over $200,000 and families making over $250,000 a year. As I suggested last week, I do not think he will back off of this promise. That’s another reason this is bound to get ugly.  Stay tuned.

Deficit Tops $1 Trillion For 4^th Straight Year

The federal government logged a $1.1 trillion budget deficit in fiscal year 2012, marking the fourth straight year of trillion-dollar shortfalls.  As a share of the economy, the deficit fell to roughly 7%, according to Congressional Budget Office estimates released Friday. That’s down from 8.7% in 2011, and well below the bruising 10.1% recorded in 2009 during the depth of the economic downturn. Still, deficits as a share of GDP in the past four years have been the highest since 1947.

The decline in the deficit in fiscal year 2012 was largely due to an uptick in federal revenue. Compared to last year, the federal government collected 6% more in FY2012, which ended on September 30. A big reason for that was the jump in corporate tax receipts, which rose a whopping 34% in FY2012 according to the CBO.

Individual income tax and payroll tax receipts were also higher, by 3% and 4%, respectively. Spending, meanwhile, federal spending fell only 2% in FY2012. That decline, however, is due mostly to shifts in the timing of payments, the CBO said.

Year-over-year outlays for Medicaid, unemployment benefits, defense and education programs all fell. Meanwhile, Social Security outlays rose 6%, more than in recent years. Money spent
on Medicare increased more slowly than in the previous two years, rising 3%.

Overall, the 2012 deficit pushed the debt held by the public to another record high. Publicly-held debt of $11.3 trillion is almost 73% of GDP, up from 67.7% a year ago. As noted above, total national debt is $16.2 trillion, which is more than 100% of GDP. We’re definitely on the way to becoming Greece!

Wishing You All A HAPPY THANKSGIVING!

As we head into the Thanksgiving holiday week each year, I always pause and reflect on the things I am most thankful for, both in my professional career and in my personal life. For many people, it is hard to be genuinely thankful given that there are a lot of problems out there. But not for me as I have more blessings in my life than I can count!

I want to express my sincere appreciation to all of you who regularly read my E-Letters. Since the start in September of 2002, my E-Letters now go out to around half a million people each week. And I especially thank those of you who give me feedback. Your comments and suggestions definitely help me to put out a better E-Letter.

Finally, and most importantly, there continue to be those who want to challenge the “One Nation, Under God” concept, which never seems to stop. Yet I don’t think that we should ever forget to thank Him who has blessed our nation so bountifully. No matter what the detractors may say, our nation was founded upon Biblical principles, and I think that’s a big reason why America has been so successful and has lasted for so long.

These are just a few things that I am very thankful for this Thanksgiving week. As you are inundated with food, football and Christmas shopping promotions this week, please don’t forget to stop for a minute, bow your head and be thankful for all of the blessings you have received during the year. I certainly am!

Best holiday regards,

 

Gary D. Halbert

SPECIAL ARTICLES

A primer on recent debt ceiling battles (albeit from the NY Times)

Fiscal Cliff, Meet Debt Ceiling (this one from CNN)

Geithner says we should abolish the debt ceiling as soon as possible
 

 

 

 

 

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