Changes

=== 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 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 The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 5 pdf.</ref>

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>

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 The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 10 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>

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 is projected to reach $10 trillion by the end of FY2011, the wealth effect could potentially be 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 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 is projected to reach $10 trillion by the end of FY2011, the wealth effect could potentially be 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>

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur. <ref>''The Sustainability of the Federal Budget The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 16 pdf.</ref>

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur. <ref>''The Sustainability of the Federal Budget'', Congressional Research Service, June 28, 2011, p. 16 pdf.</ref>

== History of the debt limit ==

== History of the debt limit ==