June 30, 2011

Debt Ceiling for Dummies

Let us see if we cannot simplify the current, bad-faith-based debate on the debt ceiling.

First, the debt ceiling is a statutory artifact, not found in the Constitution, which limits the amount of total debt the United States is allowed to take on to finance its day-to-day operations. In theory, once the debt ceiling is reached, and the Treasury Department has exhausted the various games it is allowed to play in "redeeming" other "bonds" held by government workers, and other illusory acts of legerdemain, the government is then, again in theory, allowed to borrow no more. Since the United States government currently borrows about 42% (Paul Krugman believes that 42% is "about a third," but he's an Ivy League economist, not a mathematician, and is not required to know how to divide 2.2 by 3.8, which would tell him that a government which receives $2.2 trillion in taxes and spends $3.8 trillion is funding only 58% of its expenditures; however, this is close enough for tenure at Princeton) of the money it spends, this presents a problem.

Let us analogize to a homelier situation. Suppose we allow the role of America to be played by Bill Zup D'wazoo, a currently unemployed Wal-Mart long haul trucker living in Fontana, California, in a house he purchased (when he was living with his estranged wife Nomo [go ahead and try it with the last name]) in 2006 for $450,00, now worth $175,000, maybe, with a mortgage (unpaid during the last two years) of $575,000 (Bill re-fied a couple of times, had a line of credit-- those were the days!). In other words, a Real American. Bill has been depressed during his 95 weeks of unemployment and has gained a couple of hundred pounds. Inundated during his employed days with credit card offers, Bill has two high-limit cards, with a balance of $8,000 on the MasterCard against a credit limit of $10,000, and $2,000 against a limit of $3,000 on the Visa. Thanks to the tough-on-banks credit card relief rammed through Congress by Obama and Biden, Bank of America and Wells Fargo, the issuers of the cards, have a hard time charging Bill much more than 30% per annum in interest on these balances, and if they do raise the rates to such usurious levels, they have to tell Bill they're doing it. Thank God we have someone in Washington fighting for the Little Guy.

Bill seems, in all respects, a reasonably accurate cognate for the United States itself, fiscally and even physiognomically, if that's a word and who cares if it isn't. But looks can deceive, as will become clear perhaps. By supplementing his UE payments (four weeks to go) with charge card action, and living rent-free (at least until one of his loan servicers can figure out exactly who owns his mortgage), Bill has not had it too bad. Bill, however, now has a completely trashed credit rating and cannot "raise his debt ceiling" by getting another charge card. All he can do, after August 2, when his unemployment checks stop, is charge things to his cards, and get cash advances (suh-weet! while it lasted) with his remaining credit limit of $3,000 on the two cards.

Now you see the problem. By charging against the limit, Bill also slams his ability to borrow money against the cards in order to make payments against those same cards. Plus, BofA and Wells Fargo don't really want Bill to borrow any more money; they're just dying to find some excuse, such as a missed payment, to cancel the cards altogether, because what do you think the odds are Bill are is going to come up with $13,000 when it all goes down the toilet? Exactly. Thus, the excruciating calculus of exponential growth: if Bill makes a minimum payment of $250 against the combined balance of $10,000 at the user-friendly rate of 29% APR, a loan-sharking rate allowed because so many credit card companies are headquartered in Joe Biden's home state of Delaware, then his balance moves to $10,250, the new basis for computing interest, and Bill still has to keep using the cards for necessary expenditures at the grocery store, gas station, and Pyongyang Luau, the Korean massage parlor out near the interstate. In short, the game is rolling up.

By contrast, the United States is in a much better position. The government still has a steady source of income, the income taxes paid by increasingly unemployed Americans. While these taxes only cover 58% of necessary expenses such as blowing up Afghan and Libyan villages, the United States is not going to "default" on its debt in the way that Bill is about to default as soon as he hits the $13,000 top, can't borrow anymore, and has his cards cut in two by Ahmed down at the 7-Eleven. The $10 trillion "public" debt of the USA is financed at a gold-plated average rate of about 2.5% per year, not that loser 29%, and that's only about $250 billion a year. True, there is also the problem of maturing Treasury bonds which must be redeemed (paid off), but in August, for example, that only comes to about $30 billion. (You're probably wondering about the "interest debt" owed to the intragovernmental "trust funds" at Social Security and Medicare, with principal adding up to another $4.5 trillion. God, you're so funny! That's why I like you.) So add it up: about $20 billion in interest, $30 billion in redemptions, we're at $50 billion, or slightly more than 25% of our monthly income. You could qualify for a good 4-br w/den 2.5 ba 3-car gar 3k sq ft like Bill has with a ratio like that.

Our credit rating will be fine, for a long time, as we continue to fund Medicare, Social Security, defense and the Pentagon's current twelve wars with the balance of 75% of income still left after paying China, Japan, and the Federal Reserve, the latter of which will just send the money back to the Treasury because...oh never mind. Or maybe some of those things have to go, a little bit or a lot. A 42% pay cut can impact the lifestyle pretty noticeably. Bill's a case in point: hardly ever gets down to the Pyongyang Luau anymore, and Nomo won't return his calls, except through her lawyer. Something about having to stay at least 50 feet away from her for the next three years.

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