US Debt Ceiling: This Could Get Ugly

The next fight in Washington is going to be over the US debt ceiling. On Dec 31, 2012 the US Treasury Department confirmed the US has reached the statutory debt limit. Congress has until February 28th to raise the debt ceiling. The GOP will want the US Government to reduce spending over the long term to raise the ceiling. President Obama has already said he does not want to reduce spending but would rather just find more revenue (i.e. taxes).

The United States has a spending problem. The Fiscal Cliff has been described as a “self-inflicted” wound since the Administration and Congress knew this issue was going to come up for almost two years. The numbers below are from the last Debt Ceiling fight and compromise. I read it last year in the National Review. If you remember, the S&P 500 downgraded US debt because lawmakers could not come up with a long term solution for the out of control spending. Below is a great example of just how much this is a spending issue and not a revenue problem.

The first set of numbers is the real US revenue, budget, and debt figures from 2011. I don’t know about you, but once you start getting into the billions and trillions the numbers are mind numbing. To make it more real, take a look at the second set of numbers. All we are doing is taking off eight zeros to make it look more like a family household budget. If the family spends more than they take in, then we just add it to the credit card balance. This should put everything into context.

Why S&P Downgraded the US:
U.S. Tax revenue: $2,170,000,000,000
Federal budget: $3,820,000,000,000
New debt: $ 1,650,000,000,000
National debt: $14,271,000,000,000
April 2011 budget cut: $ 38,500,000,000

Let’s remove 8 zeros and pretend it’s a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Budget cuts: $385

That is what happened in 2011 the last time we had the US Debt Ceiling compromise. The markets had an ugly sell off and the US went to the brink of default. I hate to say it, but the prospects for a deal in 2013 look worse than 2011. The President has already said “I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they have passed.”

Many political and economic analyst say that cuts to the deficit this time around are more difficult for 2013. Apparently, all the “easy” cuts were done in 2011. What is left for 2013 is the hard choices. The GOP wants to reduce the deficit if they are going to increase the debt ceiling. The Democrats will want to keep spending as is and just raise taxes revenue. This could get ugly!

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