Before we talk about
the debt ceiling, it’s important to
realize the difference between the deficit
and the debt. Because these words
are thrown around and it’s clear that they’re
related, but sometimes people might confuse
one for the other. The deficit is how
much you overspend in a given year,
while the debt is the total amount, the
cumulative amount, of debt you you’ve gotten
over many, many years. So let’s take a look, I guess
a very simplified example, let’s say you have
some type of a country. And that country spends,
in a given year, $10. But it’s only bringing
in $6 in tax revenue. So it’s bringing in taxes. It’s only bringing in $6. So this country in this
year, where it spends $10, even though it only has $6 to
spend, it has a $4 deficit. Def is the short for deficit. And well, let me
just write it out. You might think it’s
defense or something. It has a $4 deficit. And you might say,
well, how does it spend more money
that it brings in? How can it actually
continue to spend this much? Where will it get the $4 from? And the answer is, it
will borrow that $4. Our little country
will borrow it. And so the debt, maybe
going into this year, the country already
had some debt. Maybe it already
had $100 of debt. And so in this
situation, it would have to borrow
another $4 of debt. And so exiting this year,
it would have $104 of debt. If the country runs the same
$4 deficit the year after this, then the debt will
increase to $108. If it runs another $4
deficit, than the debt will increase to $112. Now that we have
that out of the way, let’s think about what
the debt ceiling is. So you could imagine, the
United States actually does. It’s continuing
to run a deficit. It’s continuing to spend
more than it brings in. And actually, for
the United States, these ratios are appropriate. For every dollar that the
United States spends right now, 40% is borrowed. Or another way to
think about it, it only has 60% of
every dollar that it needs to spend right now. So it has to go out into the
debt markets and borrow 40% to keep spending at
its current rate. And so if it’s
continuing to borrow, you could imagine that the
debt keeps on increasing. So let me draw a
little graph here. So that axis is time. This axis right over here is the
total cumulative amount of debt that we have. We continue to have to
borrow 40% of every dollar that we’re spending. And so our debt is
continuing to increase. And Congress has the power,
or Congress has the authority, to essentially limit
how much debt we have. So right now we have a current
debt limit of $14.3 trillion. And even though Congress
has this authority, the way that it’s
worked in the past, is this kind of
just a rubber stamp. Congress has just always allowed
the debt ceiling to go up and up and up to fund
our borrowing costs. And if you think about
it, that kind of makes sense because right
now Congress is the one that decides
where to spend the money. What are the obligations. And so the debt
ceiling is like, OK, we’ve already agreed what you
have to spend your money on. Congress is the one that figures
out what we spend our money on, and what our taxes are. And so they say,
look, we’ve already determined how much
you have to borrow. It would seem kind of ridiculous
for us after we’ve determined how much you borrow to say
that you cannot borrow it. You cannot you cannot actually
do what we’ve told you to do. And so historically,
Congress has just kind of gone with the flow. They said, OK,
yeah we’ve told you we need to borrow more
money to execute– the executive branch has to
run the government– for you to actually run the
government based on the budget we told you. So they just keep upping it. And the last time the
debt ceiling was raised was actually very recently,
February 12, 2010. It was raised from
$12.3 trillion, point actually $12.4 trillion
to the $14.3 trillion. And this happens
pretty regularly. It’s happened 10 times since
2001, 74 times since 1962. So it’s just a regular
operating thing. And right now the Obama
administration says, look, we’ve actually come up
against our debt ceiling. We want to raise it, and ideally
for the Obama administration, they want to raise it
by about $2.4 trillion. So they want to raise
it to $16.7 trillion, which will kind of put it off
the table for a little bit. Put it past the
elections so that we don’t have to
debate this anymore. The Republicans on
the other the side, want to essentially
use this, and this is a little bit unusual,
to use this as leverage to essentially
reduce the deficit. And not only to
reduce the deficit, but it’s in particular to reduce
the deficit through spending cuts. And so that’s why it’s become
this big game of chicken and why we’re going
up against this limit. Now, one thing that you
may or may not realize is that we’ve
actually already hit the debt limit, the
current debt limit. And we hit that debt
limit on May 16, 2011. I’m making this video at
the end of July in 2011. And the only reason why
the country’s continuing to operate, and the only
reason why the country has been able to continue to pay
interest on its obligations, and pay issue social
security checks, and support Medicare, and buy
fuel for aircraft carriers, and all the rest,
is that Geithner, who’s the Treasury
Secretary, has been able to find cash in other
places, cash normally set aside for employee pensions
and all the rest. And has essentially done a
little bit of a bookkeeping, taking money from one
place to feed another. But what he said, what
he’s publicly said, is that he won’t be able to do
that anymore as of August 2, 2011. So this right here is
the date that everyone is paying attention
to, August 2, 2011. According to Geithner,
at that point, he won’t be able to find random
pockets of cash here and there and shuffle it around. And what he calls
extraordinary measures. And at that point,
the United States will not be able to fulfill
all of its obligations. And so if you think about all
of the obligations of the United States, this is a huge
oversimplification here. So this bar represent
all of the obligations. Some of those obligations
are things like interest on the debt that
it already owes. It already owes a huge amount
of debt, $14.3 trillion. And things like social security,
Medicare, defense, and then all of the other stuff that
the country has to support, all of their other obligations. So if as of August 2, 2011,
we cannot issue any more debt, and Geithner doesn’t have any
extra cash laying around with these extraordinary
measures, then, if those are the only
options on the table, The only option is to somehow
reduce some of these things by 40%. Because 40% of
every dollar we used to spend on all of these
obligations, 40% are borrowed. And so something over
here is going to give. We’re not going to fulfill
our obligations to one or more of these things,
all of these things that we are legally
obligated to fulfill. That Congress has said,
these are the things that the United States should
be spending its money on. And so at that point,
it is perceived that we would have to default. And a default actually would
be on any of its obligations. But in particular, we
could be, especially if we have to cut
everything by 40%. And we don’t want
to see retirees not be able to get evicted from
their houses, or aircraft carriers not have
fuel, or whatever else. We might defer, or
try to restructure, or do something
weird with our debt. In which case, we
would be defaulting. And I want to be clear,
a default, it’s usually referred to not fully paying the
interest on debt that you owe. But a default would be
any of its obligations. The United States
has this AAA rating. If the United States says it’s
going to give you a Social Security check, you trust that. If the United States
says that it’s going to pay for that Medicare
payment, you trust that. If it says it’s going to
give you an interest payment, you trust that. All of a sudden, if
United States does not fulfill any of those
obligations, then all of the obligations
becomes suspect. And the reason why this is a
big deal, as you can imagine, if you borrow money, you’ve
always been good at paying back that money, you’re
going to pay lower interest than other
people would have to pay. But all of a sudden,
for whatever reason, one day you default. You either delay
your payment, or you say you don’t have the
cash to pay your payments, then people’s like, wow
you’re a much riskier person to lend money to. So now I’m going to increase
the interest rates on you. And so the perception
is if the United States were to default on its debt,
or any of its obligations, that interest rates would go up. And the reason why this
would really not great is because it would make
the debt and the deficit even worse. Then this chunk is
going to have to grow. Our obligations are on debt. As new debt gets
issued, we’re gonna have to pay more
and more interest. So it’s going to just
make matters worse. It’s going to make
the deficit worse. And on top of
that, it’s not just that the government’s debt, the
interest on the government’s debt will go up, but interest
on all debt in the United States will probably go up. Because government debt is
perceived to be the safest, it’s the benchmark. A lot of other debt
contractors are actually tied to government debt. So you’ll have interest rates
throughout the economy go up, which is exactly
what you do not want to happen when you are
either in a recession, or when you are recovering
from a recession.