[yummyfajitas]

Here is the thing I don't understand - why are people acting as if failing to raise the debt ceiling is the same thing as default?

I.e., I might run up my credit card until I reach my $1500 limit, but I don't default if the bank fails to raise my credit limit. I only default if I fail to stop spending more money than I earn and refuse to pay my credit card bills.

[jsz0]

The US actually hit the debt celling back in May. The government has been using accounting tricks for the last 2.5 months to pay all the bills. Of course revenue is still coming in but with an estimated $1.2T budget deficit for 2011 that's not going to be nearly enough. So you're right -- the hitting of the debt ceiling back in May wasn't a huge deal because there was money left to pay the bills. What happens in early August is the government simply runs out of money. Revenue will continue coming in and would be enough to continue paying the interest on the debt for a while however the government would have to start making some very politically unpopular choices about which bills to pay.

Even if we can continue paying the interest payments you have something of a symbolic default if the US government is unable to get its fiscal affairs in order. While the US may not technically default there will be a crisis of confidence. The risks of the symbolic default are just as bad as a real default and the ramifications are almost impossible to calculate.

[HSO]

Not sure if this is a rhetorical question or not. But the way I understood it is that it's a question of refinancing federal debt. I.e. the new issues are needed to pay off existing bond holders, and if treasury was prohibited to do so, the US would be in default. Have taken my eyes off the markets for the last few months, though, so "grain of salt" and all that...

[yummyfajitas]

I'm asking because I'm genuinely curious. As for requiring new issues to pay off existing bond holders, why would that be necessary if spending were reduced or income increased? It seems as if paying off a bond holder with new debt should be more or less deficit neutral.

I.e., if I pay off $500 of my $1500 credit card bill, my credit limit remains fixed at $1500 but my debt is now only $1000. I am free to borrow another $500 if I need to.

Is the problem merely that I need to borrow $500 first, raise my debt to $2000 for one day, and then pay off $500 worth of old debt (bringing me back down to $1500)?

[HSO]

"why would that be necessary if spending were reduced or income increased?"

i think that's exactly where the problem is. the debt payments are due soon and until the republicans turned the federal debt limit into a political issue, it was being presupposed that it would be raised "automatically" by congress. now they've turned it into a bargaining tool (similar to what they did under gingrich in the nineties) and we have "inconsistent time scales", in that budgeting changes take much longer than the time to next due date. basically, the republicans hold up the extension "in return" for concessions by the president on the revenue side (i.e. no tax increases for their plutocratic clientele) and forcing him to regulate the long-term debt problem only on the spending side.

but you know what, i shouldn't be talking through my hat. i'm not american, have only limited understanding of the us budgeting process, and like i've said have turned my eyes off the markets for a while now. so if anyone knows better, please, enlighten us :-)

[yummyfajitas]

What are the inconsistent time scales? Was it somehow impossible to cut spending between January and today? How long does it take to reduce spending?

http://online.wsj.com/article/SB1000142405274870395400457608...

[HSO]

no point in replying to your questions because they obviously are rhetorical. good day, sir.

[kevinrpope]

Having rollover-debt - paying off an existing debt holder with a new issue - is deficit-negative (ie. it makes the deficit worse) because of the interest involved.

The problem is a combination of the new issue capital needs to be in the door so the old debt can be paid off (as you mention in your last sentence here) and that more debt needs to be raised each cycle to pay off the interest from the last cycle.

Also, default will not be avoided by spending cuts or tax increases alone. The debt ceiling MUST be raised so the government can borrow more money to pay the bills (I believe you asked a question related to this later on in this thread). Spending cuts and tax increases will help with future ceiling raises, but are currently relevant only as part of the bargaining to raise the debt ceiling.