Remember all that debt ceiling drama in the United States during the summer of 2011? It appears to have disappeared, despite the US federal government regularly churning out scary deficit numbers. But I think we are likely to see this issue bubble up again before the US Presidential election.
When the painful political deal to raise the debt ceiling was struck last August, the logic was to put off the debate until at least after the 2012 elections. That August 2011 bargain in the US Congress raised the debt ceiling up to $2.4 trillion to a total of $16.7 trillion to avoid default on US government obligations.
Originally, that deal projected the new debt ceiling would be reached in early 2013, time enough for politicians to get together and work on a solution to US debt problems after the 2012 elections, which are coming this November. Only one problem: The United States has been running up the tab faster than expected, and the debt ceiling may now be close to being breached in late 2012 -- close to the November elections.
Let's just look at the numbers -- at the end of March, total US debt clocked in at $15.6 trillion. That is already $1.3 trillion more than last September's famous debt ceiling of $14.3 trillion -- and only $1.1 trillion away from the new debt ceiling. With the deficit recently averaging about $120 billion per month, that means we could add another trillion in debt in just the next 10 months.
What's most disturbing is that things don't appear to be improving rapidly. In fact, March, 2012 was a record deficit -- the federal budget deficit hit $198.16 billion, which was $10 billion more than March 2011. The US Treasury Department said last week that for the first six months of fiscal 2012, the government spent $778.99 billion more than it collected. This compares with a $829.42 billion deficit for the first half of the prior year.
Runaway Debt
Does this chart scare you? It could scare markets again, too.
The Treasury Department said this March's numbers were bad because the government moved an additional $30 billion in recurring benefit payments into the month because April 1 fell on a weekend. Outlays also increased by about $20 billion because of a re-calculation of the cost of economic stimulus programs, Treasury officials maintain.
The big problem is that even with the economic and employment pictures modestly improving, with $780 billion racked up in just six months, the United States is on track for another year of more than $1 trillion in deficit spending.
With these numbers ballooning, it seems likely that a debt ceiling debate could start surfacing prior to the election, as markets take notice and start to wonder what will be done, thus unleashing a volatile cocktail of politics more extreme than August 2011, when financial markets were roiled with the potential US debt default.
Even though most experts seeing the new $16.7 trillion debt ceiling lasting until after the election, the elevated level of deficits means it could easily be pulled into 2012, rather than 2013, making it onto the front pages of newspapers (and iPads) again. The Bipartisan Policy Center recently estimated that the deadline for breaching the ceiling may be pushed into 2012 and could come dangerously close to the election.
At the very least, there's not a large buffer zone.
The prospect of a debt-ceiling breach coming up again will embolden fiscal conservatives who threatened to block the debt ceiling extension and shut down the US government in the summer of 2011. Markets were roiled at that time until a deal was struck at the last minute to extend the debt.
Next time, it could be worse. I think there's some fairly high risk here, if only because there are a lot of politicians who would love for this issue come up just before the election so that it can create more drama and debate. Something to think about if you think the markets are giving the "all clear" signal just six months before one of the biggest US elections in years.
@Scott, you are the master of understatement - no, things do NOT appear to be improving at all. Part of the problem is that most people glaze over when we're talking about hundreds of billions and trillions of dollars.
I like the way that Lenore charactorized this in her recent post about how today's economy is not like 1998 - for one thing the currrent federal deficit is 9% of our total GDP. 9% !@@!
1998
2012
Federal government spending
Relatively controlled with a surplus of 0.7% of GDP
The highest percentage of GDP in history outside of a world war with a projected budget deficit nearing 9% of GDP
It's no wonder we're on a path that may hit the new deficit ceiling around the end of the year - 9% of GDP is eye-popping huge.
New Jersey Governor Chris Christie, you may have heard, blames the deficit on the fact politicians just want to be loved.
In a speech last week at the George W. Bush Institute Conference on Taxes and Economic Growth in Manhattan, he noted, "I think politicians get themselves into the biggest trouble when they care more about being loved than being respected
"That's why we run up these deficits we run up. That's why we can't say no to anything, because we care too much about being loved."
So basically, politicians show their love for the voters by running huge deficits and the voters return the love by voting for them. Christie warns the result has been nbsp;a "paternalistic entitlement society" with "a bunch of people sitting on a couch, waiting for their next government check" -- something he expects "will not just bankrupt us financially, it will bankrupt us morally..."
One of the many reasons for the fast growing national debt, analysts concur, is the growing social welfare state in America.
Economist Ed Yardeni recently noted:
From 1993 through 2010, outlays per beneficiary for Social Security and Medicare more than doubled from $10,459 to $22,319. Over this same period, total wages and salaries in compensation and nominal GDP did about the same. Because Americans are living longer, the number of Social Security beneficiaries rose 88% over this period, and will increase at a faster rate as the Baby Boomers now start to retire.
The number of people claiming disability has soared. It rose to a record 8.7 million during March, doubling since February 1997. Over this period, their numbers have increased by 4.3 million. This helps to explain some of the drop in the labor force participation rate, which fell from 66.9% to 63.8% over this period
These numbers would seem to argue that we have leveled off and are maybe showing a very small improvement. I think we need to do something more drastic to make a real dent in the debt.
Overall US taxes would need to increase 80% on average to close the deficit. This is an incredibly large - and totally unworkable - amount.
@Noreen quoted Governor Chris Christie "it will bankrupt us morally.." And I agree. It's easier to be honest if the pot-of-gold that government is giving (or taking) is small.
Well Leon Panetta spent $870,000 of it flying between Washington and his California home in a government plane, the WSJ reported today. He reimbursed the govt. only $630 or 2% of the cost of each of the $30,000 taxpayer funded trips.
good questions. Let' see, I'd really like to be able to have several homes and commute by private jet at the taxpayers' expense. Why won't they let me do that?
"Well Leon Panetta spent $870,000 of it flying between Washington and his California home in a government plane, the WSJ reported today. He reimbursed the govt. only $630 or 2% of the cost of each of the $30,000 taxpayer funded trips."
Reading stuff like this makes me sick to my stomach. I just don't get how this type of spending is allowed to go unpunished! Furthermore, is it possible to find a politician who isn't a complete clown?
You made some great points there. Everybody makes the budget problem out to be the economy and Repubs vs. Dems, but it's more complicated than that. We are dealing with large demographic shifts, with lots of baby-boomers retiring and less workers to support them. That means the budget will get increasingly difficult to balance regardless of the economy or tax policy. The bottom line is that our population is aging, living longer, and becoming more expensive to support.
I realized a lot more people were going on disability as an option to unemployment, but I was still surprised to read the actual numbers.
It comes down to a survival strategy, don't you think? No job, no prospects, a little too old to start a new career, too young to retire...so build a case for a disability. But that loss of experienced workers is nonetheless depressing -- and it is depressing to think of those people sitting on their couches because they couldn't get jobs.
"paternalistic entitlement society" with "a bunch of people sitting on a couch, waiting for their next government check" -- something he expects "will not just bankrupt us financially, it will bankrupt us morally..."
@noreen, Christie's comments make absolutely no sense to me. I know it's sort of out of context, but his comments sound like he's blaming the voters for voting in these spending pols. The problem is still that the pols are spending money and are solely responsible for the money they spend.
What I mean is, say you have a political battle between 3 challengers and not a single dime is spent by any of them so they can "be loved"...at the end of the election, one of them is still going to be voted into the office without having spent a dime.
I think it's safe to say that there's nothing in the world that is going to stop the national debt from rising higher and higher. America has its hands in just about everything that's going on in this world, not to mention the money being spent on the military's involvement overseas.
All that's going to happen is a presidential candidate is going to come into office on the platform of lowering the debt, go the next 4 yrs spending more and more and then leave office with a simple: "well, I sure did give it my best shot..."
Can't agree more. I just don't understand why congress'd have raised debt ceiling in the last year and hoped it'd be dealt with after election. What did they expect after election. Would the new president (whoever he/she is) just pull a magic solution at that time? To solve this hugh debt problem, it's going to be a long term process. They can't just kick the can down the road and hide their heads in sand. Talking about leadership everyday, but no politican ever shows any so far.
I think we have. We focus so much on minutiae -- small details of a person's personal life. What outstanding person has not made mistakes, and wants to be subjected to that kind of scrutiny?
"I think we have. We focus so much on minutiae -- small details of a person's personal life. What outstanding person has not made mistakes, and wants to be subjected to that kind of scrutiny?"
@driven, as much as I harp on about politicians being clowns, I actually agree with this statement. I think the one issue though is that if you're going to allow this person to make important decisions to impact multiple people, then this person should also be able to make good decisions that positively impact the people who are part of their daily lives.
"Have we created a political system that discourages the best people from getting involved, leaving us with mediocrity?"
@Noreen, I don't know if it's a function of our political system as much as it being a function of the type of people who have political aspirations. *cynical alert* I honestly wonder how many people get involved in politics with the sole thought of "I want to make people's lives better" or if it's just more of a "I hate such and such and want to do something about it". They may seem like the same thought process but in essence one is about the people and the other is a self-serving desire.
"What did they expect after election. Would the new president (whoever he/she is) just pull a magic solution at that time? To solve this hugh debt problem, it's going to be a long term process."
@mInvestor, it certainly seems like they're expecting some magical solution to just manifest itself and it's this kind of backwards thinking that's going to ensure we're in debt for generations to come (if not forever). Solving the debt problem is a long term process but ONLY if there's a legitimate plan to bring in more money than we're spending...which seems like it's impossible when we're allowing pols to go on weekend benders on the taxpayer's dime.
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