Changes

There are two components to the [[national debt]]: the debt held by the public, and intra-governmental debt. The former is defined as the debt held by any individual or entity that is not the federal government, such as a mutual fund, individual investor, foreign government, or a municipal government.<ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Intra-governmental debt is debt the government owes itself, such as the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund. <ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Currently debt held by the public comprises roughly two-thirds of the total federal debt.

There are two components to the [[national debt]]: the debt held by the public, and intra-governmental debt. The former is defined as the debt held by any individual or entity that is not the federal government, such as a mutual fund, individual investor, foreign government, or a municipal government.<ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Intra-governmental debt is debt the government owes itself, such as the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund. <ref>http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit</ref> Currently debt held by the public comprises roughly two-thirds of the total federal debt.

== Obama debt ceiling crisis ==

== Obama debt ceiling crises ==

President [[Barack Obama]] voted against raising the debt ceiling in 2006.  However, he now wants to raise the debt ceiling to over twice its 2006 level. However, as Congress essentially deems the Obama administration to be a serious credit risk, Obama may not get the debt ceiling increase he wants.  This is similar to a credit card company telling a person with either no income or little income who has maxed out on his credit card that he won't get a line increase and must pay off his card, lest he be sued.  In fact, it is almost unheard of for a credit card company to give a credit line increase to someone who's maxed out on his credit card.

President [[Barack Obama]] voted against raising the debt ceiling in 2006.  However, he later wanted to raise the debt ceiling to over twice its 2006 level. However, as Congress essentially deemed the Obama administration to be a serious credit risk, Obama did not get the debt ceiling increase he wanted.  This is similar to a credit card company telling a person with either no income or little income who has maxed out on his credit card that he won't get a line increase and must pay off his card, lest he be sued.  In fact, it is almost unheard of for a credit card company to give a credit line increase to someone who's maxed out on his credit card.  But in February 2014, to avoid a public confrontation heavily weighted by the old media, many Congressional Republicans voted with Democrats to suspend the debt ceiling until March 2015 in hopes of winning back the Senate in November 2014.

The last increase in the debt ceiling occurred in early 2010 and it was signed into law by President Obama on February 12, 2010, at which stage the limit stood at $14.294 trillion. With large deficits emerging as [[baby boom]]ers retire, some members of Congress expressed concern over the government's dependence on borrowing to meet its obligations. President Obama responded by creating the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Deficit Reduction Commission), which was charged with identifying “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”<ref>[http://www.fiscalcommission.gov/ National Commission on Fiscal Responsibility and Reform], retrieved from http://www.fiscalcommission.gov , July 28, 2011.</ref> However, President Obama promptly ignored the Commission's recommendations.<ref>http://www.realclearpolitics.com/2011/06/23/cbo_quotwe_don039t_estimate_speechesquot_258038.html</ref>

The last increase in the debt ceiling occurred in February 2014 where the limit stood at $17.212 trillion. With large deficits emerging as [[baby boom]]ers retire, some members of Congress expressed concern during the first debt ceiling crisis over the government's dependence on borrowing to meet its obligations. President Obama responded by creating the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Deficit Reduction Commission), which was charged with identifying “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”<ref>[http://www.fiscalcommission.gov/ National Commission on Fiscal Responsibility and Reform], retrieved from http://www.fiscalcommission.gov , July 28, 2011.</ref> However, President Obama promptly ignored the Commission's recommendations.<ref>http://www.realclearpolitics.com/2011/06/23/cbo_quotwe_don039t_estimate_speechesquot_258038.html</ref>

The prospect of the Obama administration defaulting on its debt rose greatly when the Democrats insisted on raising taxes to cover their irresponsible spending habits.  Obama refused to engage in negotiations, much like a deadbeat who refuses to answer the phone when the creditors are calling.  Unfortunately for the world, Obama's personal irresponsibility will hurt many honest hard working people who have done nothing wrong.

The prospect of the Obama administration defaulting on its debt rose greatly when the Democrats insisted on raising taxes to cover their irresponsible spending habits.  Obama refused to engage in negotiations, much like a deadbeat who refuses to answer the phone when the creditors are calling.  Unfortunately for the world, Obama's personal irresponsibility will hurt many honest hard working people who have done nothing wrong.

=== Background to Obama debt crisis ===

=== Background to first Obama debt crisis ===

After the failure of President Obama's [[Recovery Summer|Stimulus package]],<ref>[http://www.newsweek.com/2010/10/01/obama-s-failure-of-leadership.print.html Obama’s Failure of Leadership], [[Eleanor Clift]], ''[[Newsweek]]'', 10/4/10.</ref> his entire [[White House]] economic team quit.<ref>[http://www.france24.com/en/20100922-summers-latest-member-obama-economic-team-quit-0 Summers latest member of Obama economic team to quit]</ref><ref>[http://www.dailyfinance.com/2010/11/23/two-white-house-economic-advisers-to-quit/ http://www.dailyfinance.com/2010/11/23/two-white-house-economic-advisers-to-quit/ More White House Economic Advisers to Step Down ]</ref> During the next few years, the deficit was projected to fall somewhat, but if discretionary spending were to stay at the same level, the deficit would not fall enough under President Obama's economic policies to stabilize debt payments. Further, the debt is projected to begin rising more rapidly under Obama's policy because of the rising costs of [[Social Security]], [[Medicare]], and [[Medicaid]].

After the failure of President Obama's [[Recovery Summer|Stimulus package]],<ref>[http://www.newsweek.com/2010/10/01/obama-s-failure-of-leadership.print.html Obama’s Failure of Leadership], [[Eleanor Clift]], ''[[Newsweek]]'', 10/4/10.</ref> his entire [[White House]] economic team quit.<ref>[http://www.france24.com/en/20100922-summers-latest-member-obama-economic-team-quit-0 Summers latest member of Obama economic team to quit]</ref><ref>[http://www.dailyfinance.com/2010/11/23/two-white-house-economic-advisers-to-quit/ http://www.dailyfinance.com/2010/11/23/two-white-house-economic-advisers-to-quit/ More White House Economic Advisers to Step Down ]</ref> During the next few years, the deficit was projected to fall somewhat, but if discretionary spending were to stay at the same level, the deficit would not fall enough under President Obama's economic policies to stabilize debt payments. Further, the debt was projected to begin rising more rapidly under Obama's policy because of the rising costs of [[Social Security]], [[Medicare]], and [[Medicaid]].

=== Unsustainability of Obama deficits ===

=== Unsustainability of Obama deficits ===

The Obama deficits are currently more than half the size of total private savings. Even before President Obama's massive increase in deficits, the national savings rate was insufficient to finance job creation (or "domestic private investment").<ref>''[https://www.hsdl.org/?view&doc=145045&coll=limited The Sustainability of the Federal Budget]'', Congressional Research Service, June 28, 2011, p. 2 pdf.</ref> To sustain large deficits, the economy would require a combination of more private saving (less consumption), lower investment (less job creation), and higher borrowing from abroad. The unsustainability of deficits tends to be triggered rapidly, as no investor wants to be the one still holding the government debt when eventual default or hyperinflation occurs.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 5 pdf.</ref>

In 2011, the Obama deficits were more than half the size of total private savings. Even before President Obama's massive increase in deficits, the national savings rate was insufficient to finance job creation (or "domestic private investment").<ref>''[https://www.hsdl.org/?view&doc=145045&coll=limited The Sustainability of the Federal Budget]'', Congressional Research Service, June 28, 2011, p. 2 pdf.</ref> To sustain large deficits, the economy would require a combination of more private saving (less consumption), lower investment (less job creation), and higher borrowing from abroad. The unsustainability of deficits tends to be triggered rapidly, as no investor wants to be the one still holding the government debt when eventual default or hyperinflation occurs.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 5 pdf.</ref>

Foreigners currently hold $4.5 trillion (more than half) of the total privately held government debt. Foreigners are usually less willing to buy and hold government debt because they bear exchange-rate risk. Default or monetization typically leads to currency devaluation and would reduce the debt’s value in foreign currencies. If foreigners were to become less willing to finance the U.S. Government's operations, significantly higher [[interest rate]]s would have to be paid by Americans. Now that some foreign governments hold large portfolios of U.S. Government debt, any particular government would have the incentive to sell its holdings before everyone else if it believes that the debt has become unsustainable. Furthermore, if interest rates and the cost of carrying the debt were to rise suddenly, higher debt payments to foreigners would result in a fall in Americans personal income as wealth is transferred abroad.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 10 pdf.</ref>

In 2011, foreigners held $4.5 trillion (more than half) of the total privately held government debt. Foreigners are usually less willing to buy and hold government debt because they bear exchange-rate risk. Default or monetization typically leads to currency devaluation and would reduce the debt’s value in foreign currencies. If foreigners were to become less willing to finance the U.S. Government's operations, significantly higher [[interest rate]]s would have to be paid by Americans. Now that some foreign governments hold large portfolios of U.S. Government debt, any particular government would have the incentive to sell its holdings before everyone else if it believes that the debt has become unsustainable. Furthermore, if interest rates and the cost of carrying the debt were to rise suddenly, higher debt payments to foreigners would result in a fall in Americans personal income as wealth is transferred abroad.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 10 pdf.</ref>

Leaving the deficit at an unsustainable size retains the risk that the budget could at some point enter a debt spiral, in which the U.S. Treasury rates rose sharply and suddenly. The direct effect of higher interest rates stemming from greater credit risk would be to reduce the value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt reached $10 trillion at the end of FY2011, the wealth effect has become increasingly large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, pp. 11-12 pdf.</ref>

Leaving the deficit at an unsustainable size retains the risk that the budget could at some point enter a debt spiral, in which the U.S. Treasury rates rose sharply and suddenly. The direct effect of higher interest rates stemming from greater credit risk would be to reduce the value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt reached $10 trillion at the end of FY2011, the wealth effect has become increasingly large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.<ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, pp. 11-12 pdf.</ref>