Borrowing money to pay back borrowed money
Posted by aogTuesday, 01 October 2013 at 14:12
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I see this kind of statement made frequently with regard to the federal debt ceiling —
A failure to raise the debt ceiling to pay for bills that Congress has already contracted could lead to a worldwide recession or worse.
No! How can any one be that clueless? You don’t borrow money to pay off previously borrowed money. The term for doing that is “bankruptcy”. You pay off debts by using your revenue stream and the federal government revenues are not dependent in any way on the debt ceiling.
Of course, we have President Obama who is dumb enough to say in public “raising the debt ceiling does not increase our debt […] All it does is it says you got to pay the bills that you’ve already racked up, Congress”. That’s pathetic, even for a guy who regularly muffs his facts.
Meanwhile we are having an actual issue with passing a continuing resolution to keep the government funded (which could actually impact debt payments), which is primarily because the Democratic Party, particularly those in the Senate, have been massively derelict in their duties while the GOP in the House has at least made an effort. Yet I am confident Old Media will hold the former blameless, because Obama!
P.S. The story of legislation trying to express the Constitutional requirements in law but blocked, of course, by the Democratic Party, which has no interest in Constitutionality and fiscal responsibility.
Wednesday, 02 October 2013 at 08:17|
Can you explain that to me?
Well, please first notice I used the term “effectively to make the choice for default”, where by “effective” I mean this is what may likely happen in practice, even though it was not mandatory to happen.
I don’t think I am telling anything you do not know, but let’s try anyway: The money of your revenue is already distributed among many directions, including a part of it separated to pay for previous debts who are expiring now. As it happens now, you even need more money than your revenues provide to complete everything government and congress previously determined.
If you have a solid debt ceiling, what happens is that your govt. is obliged to not fullfill everything it was supposed to. As no one particular program would likely accept to be defunded, a possible casuality is the money you would pay the previous debt with. In fact, I do not really know how it works, since both the debts and a lot of other programs, by the extent I’ve heard, are mandatory spendings, so there may be a collision of laws here and I do not know how it goes. This uncertainity, I guess, is the main element to be priced by the market, causing higher interest rates.
That won’t, and can’t, happen for the federal government. Interest rates are already near zero, how much lower do you think they’ll go?
This is the point, they are zero for money borrowed now. The money of previous debts you need to pay now were borrowed many years ago, when the interest rate was higher. With the debt ceiling, you are not allowed to enjoy this financial possibility of reducing the interest in part of your overall debt.
As for Krugman, by all he writes, I am sure he sees many of your economic positions in the same light. With the difference is that he actually may know a thing or two about economy that we don’t.