Monday, June 06, 2011

Why Congress Shouldn't Raise the Deficit Ceiling

Listening to the Democrats in Washington and their allies in the liberal media one would think that the United States is similar to Greece and on the brink of financial collapse.

However, looking at the financial markets, especially the bond market, one sees business as usual with no concern.

The markets are only concerned with default if the default, which is failing to pay or being unable to pay a debt on time, affects the government's ability to pay the interest due bond holders when due. What the markets are concerned with is not whether the U.S. Government will be pay all its bills on time, but whether or not the U.S. Government will be able to make the full interest payment that is due holders of U.S. Government bonds later this summer.

In the case of the U.S. Government, even skipping the interest payment would not put the U.S. on par with Greece. Instead, it would be more like and individual being late with a mortgage payment. The bank would become concerned, slap a late charge on the account and lower the individual's credit score. However, so long as the borrower has the potential to continue to make payments, the bank is not going to foreclose just because a payment is a few days late.

The United States remains a very wealthy nation and has the capacity to honor all of the government's debts.

The U.S. Government is basically having a cash flow problem in which its revenues (tax receipts and other sources of revenue) are not quite sufficient to meet its expenses as they come due. This revenue shortage is due partly to the recession which has resulted in an economic slowdown and mostly due to the out of control spending by the mostly Democratic Congress and Obama Administration.

This irresponsible spending binge has now caught up with them and their solution is to ask Congress to be allowed to borrow more and to also raise taxes so that the Administration's spending binge can continue. This is like an individual maxing out his credit cards in Vegas and, rather than coming home, calls his credit card issuers and asks to have his credit limit raised on the cards and then calling his employer requesting a raise supposedly to pay down the debt.

However, if he gets the credit card limits increased and pay raise he will simply continue his Las Vegas vacation and run his debts up to the new credit card limits.

If the employer and credit card issuers refuse to grant the vacationer's requests, he will be forced to cut his vacation short, return home and start making some serious changes in his spending habits.

The same is true of the Administration and Democratic controlled Senate. This is why the Republican controlled House of Representatives should hold the line and demand major spending cuts, and no tax increases, before agreeing to raise the debt limit which will allow the Government to continue to pay all of its bills - bond interest and other bills - on time as they come due.

Since the U.S. Constitution stipulates that all revenue bills (i.e., bills dealing with taxes, spending and borrowing authority) must originate in the House of Representatives, responsibility for halting the insane spending and borrowing by the government lies with the House of Representatives. With their control of the House of Representatives, the Republicans are in a position to force the rest of the government to get its fiscal house in order so that U.S. does not end up facing bankruptcy like Greece.

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