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Debt Ceiling History Shows Irony Of Current Fight

14 Jun 2011
Posted by Stan Collender

The ironies about the current debt ceiling fight abound. As my column from today's Roll Call shows, not only has the debt ceiling not always been linked with deficit reduction, but the GOP is trying both to deny and insist that not increasing the government's borrowing limit by August 2 will cause real damage.

 

A Look Back: Debt Ceiling Debate Then and Now

September marks the 26th anniversary of the introduction of the Gramm-Rudman-Hollings Act, the much- maligned deficit reduction process that budget historians and analysts generally consider to have failed miserably. What few people remember about that law is that it wasn’t stand-alone legislation; it was an amendment offered to what was considered at the time to be an unrelated bill the Senate was debating — an increase in the debt ceiling.


That’s right. In 1985, increasing the debt ceiling and reducing the budget deficit were not thought to be inextricably connected. That was in spite of the soaring federal debt — the deficit in fiscal 1985 and the projected deficit for fiscal 1986 were the highest as a percentage of the gross domestic product since World War II.

Gramm-Rudman-Hollings was added to the debt ceiling bill in the Senate for three reasons. First, it was the idea of the three Senators for which the process was named — Republicans Phil Gramm (Texas) and Warren Rudman (N.H.) and Democrat Fritz Hollings (S.C.). Second, the Senate doesn’t have the same germaneness restrictions as the House, so offering an amendment that was considered outside the scope of the bill was more acceptable.

The third reason was that the debt ceiling in 1985 was considered to be “must-pass” legislation. It was one of the few bills most Representatives and Senators from both political parties thought absolutely had to be enacted when it was needed or the government would turn into a fiscal pumpkin at midnight when the existing ceiling expired. As a result, there were frequently attempts to add unrelated amendments to debt ceiling bills on the assumption that the perceived need for the legislation at some point would overwhelm opposition to individual provisions.

In 1985, increasing the debt ceiling was considered to be a largely technical means-of-financing question, while deficit reduction was always a highly charged policy. As hard as it is to imagine today — and even though government borrowing is obviously related to whether there is an annual deficit — the two issues were treated separately back then, and the borrowing limit was almost an afterthought.

The must-pass notion began to change a decade later when the debt ceiling became a big part of the tug-of-war over tax cuts between the Clinton administration and Congressional Republicans and after Treasury Secretary Bob Rubin funded the government for a short time with cash-management techniques that few others knew existed. Rubin’s actions frustrated Republicans who suddenly found that what they had always been told about the must-pass nature of the debt ceiling wasn’t exactly (or at least immediately) true and didn’t provide them with the leverage they had been assuming would force the White House to do what they wanted.

The popular linking of the debt ceiling with deficit reduction is something that’s really occurred only since the 2010 elections. That’s when the tea party wing of the Republican Party made not voting to raise the government’s borrowing limit one of its most basic tenets. For the tea partyers, it’s as much a test for Republican lawmakers as the pledge not to raise taxes.

The situation in 2011 is a direct result of what’s happened since Gramm-Rudman-Hollings became law in 1985. The two issues — reducing the deficit and increasing the debt ceiling — might not be linked forever, but they clearly are connected at the budget hip right now.

But the more interesting change is how the current GOP strategy is based on both denying and relying on the must-pass nature of the debt ceiling. On the one hand, many Congressional Republicans are insisting that they don’t have to vote for an increase in the debt ceiling because the presumed dire consequences of not acting won’t be that bad. On the other hand, they’re also insisting that not raising the debt ceiling will indeed be harmful and, therefore, the White House had better agree to do what they want.

There’s a far wider understanding now that the true deadline for increasing the debt ceiling is not the precise moment it’s reached. As Rubin demonstrated 15 years ago, the government has other ways to finance its operations that delay the day of reckoning for a period of time.

The one thing these changes don’t take into account is that the market for Treasury debt is now very different in a number of important ways. Not only is the amount of debt far greater and the percentage of foreign-owned debt the highest in recent history, but the reporting on the bond market and federal finances is now much greater, faster and opinionated than it was when Gramm, Rudman and Hollings were devising their plan and when Republicans and the White House were battling in the mid-1990s. As a result, developments in Washington typically have a bigger and more immediate effect on the markets.

This is why the current situation is fraught with so much uncertainty and danger. The Congressional Republican strategy of using the debt ceiling to force the White House to make changes is clearly based on the lessons learned over the past two and a half decades, but it seems not to take into account market changes that could render those lessons useless. That means that, as has happened each time in the past when it’s been tried, the results of the debt ceiling fight are likely to be seen as not worth the effort.

Sic Transit Gloria Mundi

"This country now possesses the strongest credit in the world. The full consequences of a default -- or even the serious prospect of default -- by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The Nation can ill afford to allow such a result. The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns."
-- Ronald Reagan, November 16, 1983

I can remember when Republicans venerated Reagan.

Failure to raise the debt by [August 4] would create uncertainty and fear, and threaten the credit rating of the United States.
-- US Chamber of Commerce, May 13, 2011

I can remember when Republicans hated uncertainty.

The GOP may not care about consistency or appearance, but they care about campaign contributions.


It's only "danger" if you're worried about the outcome

It's only "danger" if you're worried about the outcome - and there's substantial evidence to show that the Republicans are all but cheering for blowing up the economy. For them, warnings about consequences are like OSHA stickers on a suicide vest.


oops

Could be enough loss in asset value associated with a default to take back the advantages of tax reductions for high income taxpayers. How's that for bringing in an air strike on your own troops?


Raising of the debt ceiling

Raising of the debt ceiling is an almost complete irrelevance to the "bond market".

The major purchaser of government debt over the past year or so has been the Federal Reserve itself -- and it is not a rational buyer at all. It is simply monetizing the deficit as part of its QE2 and continuing bank (and primary dealer) bailout.

Likewise, every other central bank purchaser of that debt is doing so purely to manipulate currency and collateralize their own monetary easing. That motivation will not change in the slightest.

There is NO ONE out there who is actually purchasing government debt with the notion that they will clip coupons and get their principal repaid (presumably in purchasing-equivalent dollars at that point in the future).

Nor is there any bond buyer out there now who would possibly say "Oh golly. The US has now arbitrarily raised their own credit limit. Whew. Now they are much more creditworthy and I'll jump in to lend them more money." Get real.

This is entirely about politics - not about the bond markets. Dems want to postpone the day of discussing spending restraint until sometime after hell freezes over. And Republicans want to re-establish their "street cred" that they are fiscally responsible after a decade+ of squandering that cred.

Neither of them should be remotely trusted. And honestly, the only two people I personally know who do trust either of them are both half-wits.


Debt ceiling

Either I'm confused or the author of this little essay is. I thought I understood that the US hit the limit of its borrowing six or eight weeks ago, but that nothing would happen right away because of the ability (mentioned in the article) of the Treasury Dept. to shuffle funds around, defer things, kite checks for all I know, but that the (limited) ability of the Treasury to do so would run out of options in the first week of August.

That is, if I'm right about that, the first week of August would not be the beginning of Treasury's default-fending strategies, but the end of them.


debt ceiling

I'm dying for people to hear my thoughts on the debt ceiling. There are millions of people who are suffering with poverty at this very second. All that raising the ceiling would do is allow the people who still have their heads above water to keep ignoring those who are down and out. As a nation, we need to hit rock bottom and re-structure everything to more localized ways of living. As long as we keep raising the debt ceiling we will remain in denial and nothing will truly be addressed. It's time to bite the bullet my freinds. Join myself and millions of other good people and let's change what we are doing so we can get new results.




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