Thread: The US debt ceiling crisis (and default) explained

Heidi Moore in New York
theguardian.com, Tuesday 8 October 201

The US debt ceiling crisis explained


A House divided… Speaker John Boehner is standing firm on Republican demands for healthcare concessions Photograph: Jim Lo Scalzo/EPA

Q: I just want you to know that I would rather be doing anything, anything at all, rather than thinking about the debt ceiling again.
A: That makes two of us. Actually, it makes millions of us, according to a CNN poll this week. No one wants to be here. Let’s just do this.

Q: OK, I just mean I feel like we just did this a few months ago.
A: Yes. We did. Earlier this year, the debt-ceiling crisis was wrapped up in the “fiscal cliff,” and you can revisit it here. We also did it in 2011. Yet, here we are. Again. For the third time.

Q: Sorry, I feel sheepish about this. I have to ask again: what’s the debt ceiling?
A: Don't feel sheepish. In a just world, we shouldn't even be thinking about it this much.

The debt ceiling is the borrowing limit that Congress sets for itself. Right now, it’s at about $16.94tn. It’s designed so that Congress doesn’t recklessly spend more money than is responsible. Congress spends pretty speedily, so the debt limit usually comes up for a vote every year. Most years, it passes easily, but it hasn’t been easy since 2011.
Debt is really important to America's government. The government funds itself in two ways: one is through taxes from people and companies. The other is by borrowing money, which the government does by issuing Treasury bonds. When someone buys a Treasury bond, they are lending the government money, and the government pays them interest every month. Those interest payments are huge; the next one is about $13bn, due 17 October. The November payment is about $25bn. You can see the size of them here.

Q: So, wait, $17tn is “responsible spending?”
A: Just go with it.

Q: Right. So. If I understand this correctly, raising the debt ceiling means allowing Congress to borrow more money to pay our bills, right?
A: It means two things. One is yes, that Congress can borrow more money next year. The second thing is more important: raising the debt ceiling also means that the US Treasury, our national piggy bank, can pay the bills Congress has already run up this year. Congress has already authorized more spending than the debt ceiling allows.

Q: So the same Congress that spent money is now arguing about whether to pay its own bills.
A: Yes.

Q: What kind of bills does Congress run up? Is it all fur coats and bad music?
A: No. There’s everything in the budget, of course, like the national parks and scientific research and food inspection and all those important things. Then there are things that affect everyday life, like Social Security and retirement benefits for government workers and pay for the military. The Treasury also has to pay interest on all those government bonds that people buy. Some big payments are coming up, like Social Security payments of roughly $12bn on 9, 16 and 23 October. Overall, the Treasury needs to make payments of about $108bn between mid-October and mid-November.
The Government Accountability Office has a breakdown of the federal debt here. The Bipartisan Policy Center has a handy infographic about the people who won’t get paid if the debt ceiling isn’t raised.

Q: That sounds pretty bad. What happens if we don’t pay our bills?
A: If we don’t pay our bills, then the US defaults on its debt.

Q: What's a default?
A: A default, technically, is a failure to make a payment on your debt. It works roughly the same way that not paying your bills will lower your credit score and increase your interest payments on your credit card.

If the US government doesn’t pay its bills, it will have to pay higher interest when it borrows money – which is really bad because, as we just talked about, our government exists by borrowing trillions of dollars. The US has an almost perfect credit score right now, and very low borrowing costs. It would be really stupid to ruin that.

Q: Have we ever defaulted before?
A: Not in the modern era, at least not on purpose. But yes, there have been defaults before, as Quartz has pointed out. They were never a good thing.

Q: How would a default hurt us?
A: It could hurt the economy, since companies and stock markets depend on the idea that the US is not reckless with its finances. The US dollar is the reserve, or reference, currency for the world.

So far, however, the stock markets have been very calm.


Protestors gather outside the supreme court in June 2012, as justices prepare to rule on the Affordable Care Act. Photograph: Mark Wilson/Getty Images

Q. There’s a government shutdown too. I’ve avoided reading anything about this in the hopes that it would go away before I have to delve in. What’s going on this time? I am not sure why children are unable to get cancer treatment and then, of course, there is the mysterious and enraging silence of the Panda Cam. What’s happening?
A: Let me explain … no, there's too much. Let me sum up. Many of the same Republicans who wanted cuts to Social Security and Medicare last year dislike the President’s healthcare reform plan, the Affordable Care Act, which is known as Obamacare. They want the President to limit or reduce the healthcare requirements in the Act.

Q: Isn’t the Affordable Care Act already law?
A: Yes.

Q: Didn’t the Affordable Care Act get challenged in the supreme court last year, and then was found constitutional?
A: Yes.

Q: Do all Republicans hate the Affordable Care Act?
A: No. Some Republican governors have come around to embracing it.

Q: Maybe the lawmakers are thinking of votes. Is opposing the Affordable Care Act and forcing a shutdown a popular idea?
A: No, the majority of Americans oppose a shutdown to change the Act and blame Republicans for it.

Q: So maybe the Republicans shutting down the government think it will get them more money from powerful donors?
A: No, powerful Republican donors are annoyed and withholding money, according to one press report.

Q: So … what are we doing here?
A: On 1 October, the healthcare exchanges from Obamacare went live at healthcare.gov. Republican opponents were hoping to stop that from happening. They say Obamacare is “not ready for primetime” in the words of Eric Cantor, the House majority leader. So they forced a government shutdown until the president negotiates with them. The president has refused to negotiate about changing something that’s already in the law.


Barack Obama speaks on the government shutdown and the budget and debt ceiling debates in Congress. Photograph: Saul Loeb/AFP/Getty Images

Q: Like a ransom?
A: For criminals, it’s called a “ransom”. For congress, it’s called “leverage in a negotiation”.

Q: Really?
A: OK, fine, the President calls it a “ransom”. He has also suggested that the Republican opponents are being petulant because he won the 2012 election instead of Mitt Romney.

Q: What do the Republicans call it?
A: John Boehner, the House Speaker, said “it’s not a damn game”.

Q: So what does the shutdown have to do with the debt ceiling?
A: They’re related by the thread of chaos. If Republicans are willing to shut down the government, the president suspects they may also be of the mind to refuse to raise the debt ceiling again. Boehner has said he would not allow the US to default. More recently, he backtracked and suggested Republicans would allow the US to default if the president didn't open negotiations on the Affordable Care Act.

Q: So what happens next?
A: It’s an impasse. President Obama and Republican leaders have to figure out how to end the shutdown and raise the debt ceiling. That means talking to each other. Based on the past, we have every reason to be optimistic, obviously.

Q: Oy.
A: Yup.

http://www.theguardian.com/business/...ling-explainer

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