Saturday, January 22, 2011

Experts Warn of Reaching U.S. Debt Limit

Experts Warn of Reaching U.S. Debt Limit
By Heide B. Malhotra
Epoch Times Staff

WASHINGTON—In the early morning of Jan. 12, the U.S. national debt reached $14.02 trillion, according to the U.S. National Debt Clock, increasing daily by an average of $4.17 billion over the past three years.

The debt ceiling was raised twice in 2008 (June 5 and Oct. 3) by a total of $1.5 trillion and in February and December 2009, by close to $1.1 trillion.

Less than a year ago, in February 2010, the U.S. Congress passed legislation to allow the debt limit to reach $14.29 trillion. The U.S. is dangerously close to reaching this limit, and estimates are that the final reckoning will come between the end of March and May of this year.

Treasury Secretary Timothy F. Geithner is feeling the heat of the ever-increasing national debt and penned a strongly worded letter to the U.S. Congress on Jan. 6.

“Failure to raise the limit would precipitate a default by the United States. ... Even a very short-term or limited default would have catastrophic economic consequences that would last for decades,” said Secretary Geithner in his letter to Congress.

The urgency of the matter and the secretary’s frustration is clearly shown by his statement, “Failure to increase the limit would be deeply irresponsible.”

Although Treasury has a few tools to hold off the inevitable default by the U.S. government for a limited time, these are only interim measures.

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Geithner suggests that Treasury could stall some programs, including reinvestment by the Civil Service Retirement and Disability Fund and reinvestment of other funds.

He provided a list of programs that could be affected if the limit isn’t raised, including retirement benefits, especially the Social Security funds, but also the federal workers retirement funds, federal civil servant salaries, and interest and principal payments on U.S. bonds.

The worst-case scenario would be that the United States would lose its international standing and its ability to borrow at low rates.

“Failure to increase the debt limit in a timely manner would threaten this position and compromise America’s creditworthiness in the eyes of the world,” said Geithner in his letter.

Digging Deeper Into Debt

“The majority of private privately-held businesses, capital suppliers, intermediaries, and service providers recognize the short and long-term harm to the economy if we dig deeper and deeper into debt,” said Dr. John Paglia, associate professor of finance at Pepperdine University.

A great majority of respondents to a Pepperdine University survey about the debt ceiling have a somewhat or definitely unfavorable view of further raising the U.S. debt ceiling. The overall view is that the federal government should reign in its free hand, including bailing out failing banks because of the “too big to fail” concept.

The debt ceiling is the most pressing issue for Congress, especially for the newly elected senators. Sen. Tom Coburn, R-Okla., gave a cautionary message concerning the debt issue in a January statement.

“The debt limit debate will be a key test. Some have cautioned new members against ‘playing chicken’ with the debt limit. Yet, by growing government to an unsustainable level both parties have been playing chicken with our future and our national survival,” Sen. Coburn said.

The call for a united and bipartisan front concerning the debt ceiling went out by Senate Minority Leader Mitch McConnell, R-Ky.

At a time “when the national debt threatens the American dream itself, when the solvency of social safety net is threatened, we must come together,” said McConnell in his recent welcoming speech to the 112th Congress.

Next: Raiding the social trust fund

Raiding the Social Security Trust Fund

There are no longer sources for the U.S. government to borrow from within. It has drained the Social Security Trust Fund, and a borrowing tactic that presents real money targets monthly surpluses from the Social Security Trust Fund, which is just a drop in the bucket.

“Projected OASDI [Old Age, Survivors and Disability Insurance, the official name for Social Security] tax income will be sufficient to finance about 75 percent of scheduled annual benefits in 2037 through 2084 after the combined OASI and DI Trust Funds are projected to be exhausted,” said Secretary Geithner and the Social Security and Medicare Boards of Trustees, in their recent Summary of the 2010 Annual Reports.

The American people are still paying more into the Social Security fund than is paid out. The surplus is then transferred into the Social Security Trust Fund, which has become in reality the U.S. federal government’s piggy bank.

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The excess funds are “converted into special-issue Treasury bonds, which are really nothing more than IOUs. In addition, the Treasury pays interest on the trust fund’s balance by crediting the trust fund with additional IOUs,” according to an article by the Heritage Foundation, a conservative think tank.

For example, by the end of 2000, the trust fund held a staggering surplus of more than $1.36 trillion, according to the Heritage Foundation. Social Security taxes from 2003 amounted to $544 billion, with $138 billion transferred to the trust fund. This surplus was then replaced by the Treasury’s IOU.

Social Security Online provided graphs showing that the trust funds swelled from $47 billion at the end of 1986 to $2.6 trillion by the end of September 2010.

The dilemma is that these funds, which should be used to provide American retirees a decent retirement, are lost due to government accounting practices. There is no real money that could be drawn down. America’s Social Security Trust Funds have been used to pay for a slew of U.S. government programs.

Allen W. Smith, professor emeritus of economics at Eastern Illinois University, quoted a 2005 remark by David Walker, former Comptroller General of the GAO, in an article on the Dissident Voice website, “There are no stocks or bonds or real estate in the trust fund. It has nothing of real value to draw down.”

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