Understanding the debt ceiling

For many people the debt ceiling is an arcane concept. They have no of
idea the impact it has or what impact it could have on America’s
economy. When the federal government has large deficits, it is spending
more money than it is taking in, in taxes. This excess spending must be
financed by debt. If the government is not allowed to issue more debt or
borrow more money, it has no way of funding the spending programs that
it is legally required to fund. It has a very difficult path at that
point.

First it must stop spending, on not just non-essential government programs but on all government programs. Its spending will be limited to the amount of tax revenue. Government spending cuts mean that large numbers of federal employees must be furloughed, transfer programs such as Medicare and Medicaid will not be funded and other government spending with federal contractors such as highways, airports, etc., will be curtailed.

If we immediately stop these services and transfer payments it will have a negative impact on the economy, including the loss of jobs. The second major impact has to do with the supply of money. Federal debt forms the basis of capital used in our banking system. The third major impact has to do with the issuance of federal debt instruments. When federal debt matures, which takes 30 to 60 days after the debt ceiling is not extended, the government will have no alternative to paying off maturing debt. This means the U.S. government has the potential of defaulting on its legal obligations to bond holders throughout the world. A default on government debt will throw the international monetary system and the entire global economy into chaos.

Sixty-five percent of the American public’s support appears to be in favor of not extending the debt ceiling. The catastrophic impact of not extending the debt ceilings gives the Republicans in Congress much leverage. We the people implicitly understand that the federal government is out of control and that the national debt is too big and shouldn’t be increased. What many don’t understand is that the only way to accomplish this is to stop spending on items that affect all Americans, such as Social Security, Medicare, Medicaid, block grants to states, highways, etc. The leverage this gives to Congress is that the Democrats and the president recognize not extending the debt ceiling as catastrophic to the world economy.

Armstrong Williams is on Sirius/XM Power 169, 7-8 p.m. and 4-5 a.m., Monday through Friday. Become a fan on Facebook at www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside.