No Reason to Raise Federal Debt Limit

Yahoo Finance says, "5 Consequences if America Doesn’t Raise the Debt Ceiling David Walker, former Comptroller General of the U.S. and [former] head of the Government Accountability Office, says it's imperative both sides of the aisle find a compromise that also sets conditions to lower long-term debt and get back on track. If not, the rest of us will pay.

1. $4 billion-plus a day will come out of the economy.
2. Government and civilian military workers will be laid off temporarily. That will result in penalties for late payment, to be paid by taxpayers.
3. Social security payments will be delayed.
4. No one knows how bad the reaction will be, but Walker is confident it will be negative for the stock and bond markets and the economy.
5. Interest rates will rise. For every 1% rise in interest rates, taxpayers will be on the hook for an additional $150 billion in debt payments.

David Walker has given the above five reasons for raising the federal debt limit. Let's look at each one of these in detail:

1. The government is spending $4 billion per day more than it is taking in. Irrelevant! The $4 billion per day excess spending is being obtained by borrowing. Does it make sense that raising the debt limit has any effect on the $4 billion per day spending? If we are overspending by $4 billion per day, the debt ceiling has nothing to do with it. The only way to obtain balance is to either increase revenue by confiscating $4 billion per day from the public through taxes, or reducing spending by $4 billion per day.

2. Government and civilian military workers will be laid off temporarily, which will result in penalties for late payment. Untrue! If there is late payment of salaries, government only has to pay interest on the delay. This would be no different than paying interest on any bonds sold under increasing the debt limit. In addition, the obvious answer is to not lay off government and civilian military workers temporarily. Lay them off permanently.

3. Social Security payments will be delayed. Not necessarily! They will be delayed only if Pres. Obama and the Sec. of the Treasury decide to delay them. The fact is that there is sufficient revenue to pay Social Security and there is obligation to do so from the Social Security Trust Fund. The Treasury could always find someplace else to delay payments. Pres. Obama has only put out this delay threat as motivation for support of seniors to extend the federal debt limit and give him a deeper pockets for more spending.

4. Walker asserts that not raising the debt limit will have a negative effect on the stock and bond markets, unemployment, and the economy in general. He gives no reason for that conclusion. Alternatively, I can also assert that not raising the debt limit will have a favorable effect on those factors. Is his guess better than mine?

5. If the debt limit is not raised, interest rates will rise. This is a red herring! Walker is likely talking about interest rates on government bond issues. The interest rate on a bond is always related to the bond rating. The rating is a measure of the probability of the bond issuer to pay the stated interest and eventually the principal, when the bond becomes due. The weaker the rating, the higher the interest necessary for the buyer to justify taking increased risk of default on interest and principal.

Moody rates federal government bonds, municipal bonds, corporate bonds, etc. The highest rating is AAA, which also pays the lowest interest. The AAA rating is based on the credit worthiness of the organization. In other words, does the organization have a proper balance of revenues and expenditures. If expenditures exceed revenues, it is apparent that the organization will eventually default on its loans (bonds) and the rating must be decreased with an attendant increase in interest rates.

On that point of an increase in interest rates, Walker is correct. We can expect to see a decrease in US government bond ratings and an attendant increase in interest. However, the key point is that whether there is an increase in the government debt limit or no increase, the fact of credit worthiness remains unchanged. If we continue to spend $4 billion per day more than we take in, Moody will say we will eventually go bust and default on our bonds. Increasing the debt limit will only increase the amount of the default we will later face.


I'm a little surprised that David Walker, who was supposed to be cognizant of financial matters, has come up with these silly reasons to extend the federal limit. If he were presently working for Pres. Obama and Timothy Geithner, I could understand a partial excuse. As it is, I am completely non-plussed.