Well, I suppose that would be one way to eliminate the “uncertainty” that bond ratings agencies take into consideration when assessing U.S. debt. Just forget the debt ceiling altogether! In that case, spendaholic politicians would be even more certain to drive the U.S. economy over the cliff, but at least the country will retain its AAA-rating in the process.
Do I have that about right?
The federal government is currently facing about $62 trillion in unfunded obligations. Question: Why are U.S. bonds still AAA-rated, period?
Hat tip to Drudge, although I am linking to the write-up at Fox Business because it includes what I think are some interesting historical details on the debt ceiling.
Should there be a debt limit at all? Moody’s Investors Service doesn’t think so.
In a new report that says the debt ceiling creates “periodic uncertainty” is an intriguing line: “The current wide divisions between the House of Representatives and the Obama administration over the debt limit creates a high level of uncertainty and causes us to raise our assessment of event risk.
We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty.”
Translation: Moody’s is asking the U.S. government to toss the limit, and instead have a framework based on the size of the total budget to keep borrowing in check. Can that work?
Unlikely, given that DC’s political dysfunction in high definition looks more like Italy with each passing day, which in turn means US Treasuries could look more and more like emerging market debt.
Last week both Moody’s and Standard & Poor’s threatened to slash the U.S.’s Triple-A rating down to double-A status if the government opted to default and did not pay interest on Treasuries, after blowing past the debt ceiling.
Both Moody’s and Standard & Poor’s have said the debt ceiling is not the big issue. It’s the size of the U.S. debt at more than $14 trillion, which doesn’t include liabilities for Social Security and Medicare. Nor does it include the cost of U.S. conservatorship for housing finance companies Fannie Mae and Freddie Mac, at more than $5.5 trillion. Factor that debt in, and the US debt surpasses the gross domestic product of the planet, at more than $70 trillion.
Economists Carmen Reinhart and Ken Rogoff have already reported that, historically, economies shrink as public debt exceeds 90% of GDP.
The problem is, the U.S. historically has blunted the twin blade of the scissors to cut the deficit, a debt ceiling and a balanced budget amendment to the Constitution, which takes two-thirds of Congress and three-quarters of the states to pass.
The U.S. enacted the first ceiling on the national debt in 1917 as part of a law that ended a requirement that Congress approve every debt issue. President Woodrow Wilson then signed into law Second Liberty Bond act of 1917.
Even at that time, elected officials knew they were making borrowing easier, as Congress was concerned about paying for World War I, says the Congressional Research Service [CRS].
The first ceiling was $8 billion over the prewar level of about $3 billion.
Sure enough, by the end of World War I, the government hiked the limit to $43 billion. For the first time, in 1939, Congress applied the limit to nearly all federal debt; by the end of World War II, the limit had risen to $300 billion, says CRS.
In the 1960s and 1970s, inflation and deficits grew hand-in-hand, CRS notes. In 1981, President Reagan signed the first debt ceiling that exceeded $1 trillion. Since then, the debt has grown faster than inflation. The most recent debt limit, enacted in February 2010, is $14.29 trillion.
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