Understanding the Debt Ceiling and the Government Shut Down

South San Francisco, CA October 11, 2013  Submitted by Assemblymen Kevin Mullin

There is a lot of information about the Debt Ceiling and Government Shutdown out there. Here are some basic facts about the problems and implications:

• The Federal government shutdown is a result of Congress failing to pass a continuing resolution to pay for discretionary programs absent a budget agreement. The continuing resolution passed by the House included language to defund the Affordable Care Act. The last full budget signed by the President occurred in 2009. Since that time the government has been funded through a series of continuing resolutions.
• According to Mark Zandi, chief economist and co-founder of Moody’s Analytics a prolonged government shutdown of three to four weeks could result in a reducing GDP by 1.4%. Other economists believe that the Government shutdown will reduce confidence in the economy and will cause businesses to reduce purchases of new equipment and slow new hiring.
• Americans’ confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup’s Economic Confidence Index tumbled 12 points to -34 last week
• The debt ceiling debate is the second part of a two part crisis.
• What is the debt ceiling? The debt ceiling is the total amount of money the U.S. government can borrow (by selling Treasury bonds) to pay its obligations, including interest on the national debt, Social Security and Medicare benefits, and many other payments. The limit is not on future spending but on previous authorizations created by congressional action.
• The debt ceiling does not impact the federal deficit. The process of setting the debt ceiling is separate and distinct from the United States budget process, and raising the debt ceiling neither directly increases nor decreases the budget deficit, and vice versa. The Government Accountability Office explains, “the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”
• Lessons from the 2011 debt ceiling crisis. In 2011, the delay in raising the debt ceiling led to the first ever downgrade in the federal government’s credit rating. The credit downgrade and debt ceiling debacle contributed to the Dow Jones Industrial Average (DJIA) falling 2,000 points in late July and August. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on August 8. The Bipartisan Policy Center found that the delay raised borrowing costs by $18.9 billion over ten years.
• Failure to raise the debt ceiling will cause the U.S. to default on debt payments.
• In a default the value of Treasury bonds and the dollar would nosedive. The nation’s borrowing costs would soar as anxious investors demanded a higher return to buy suddenly shaky U.S. debt.
• Treasuries provide a benchmark for rates on other loans, from mortgages and credit cards to car and student loans, borrowing would become far more costly for consumers and businesses. Stock markets in the U.S. and elsewhere around the world would almost certainly plunge.
• Economists have estimated that a few missed Treasury-bond payments in 1979, the result of a brief technical glitch, pushed up interest rates by 0.6 percentage point and boosted the U.S. government’s borrowing costs by $12 billion a year.
• Global markets will see the U.S. government as grossly and dangerously incompetent.
• Refusing to raise the debt ceiling is fundamentally different from cutting the government’s funding – a default by the United States would freeze global markets and leave the U.S. government unable to respond because of its own creditworthiness is the very cause of the global panic.
• Fitch Ratings has said in regard to the debt ceiling debate that “Failure to raise the federal debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings and likely lead to a downgrade.”

Hope this helps with any discussions you might be participating in or helps interpret these events as they transpire.

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