Scrap the stupid debt ceiling law

The world should have taken much better precautions to child-proof the global financial system when the new House Republican majority swept into power this year. It didn't take long for this chest-thumping wave of brats to sniff out the dangerous products kept unguarded under the sink. Now they've doused the economy in flammables, are standing above it with a match, demanding quick multi-trillion dollar cuts to everything.

The debt ceiling is a statutory law that, in modern times, needs to be passed to meet the outlays to which the federal government has already committed. Not doing so, in the midst of the worst economy since the Great Depression, would only allow the government to meet about 60% of its obligations until a partial default, lowering the credit rating of the safest investment in the world – US Treasury bonds, to which the reserves of a great many financial contracts are linked. So a hike in the ceiling really should be passed. But it might not be! Yet it needs to be? It still may not!

This is when you know that an old law that doesn't jibe well with the modern workings of society needs to be destroyed.

Congresses past have understood the significance of playing chicken with the nation's credit rating. They've maintained an informal pact to raise it when approached. The minority party could vote against it to embarrass or show disapproval to the majority, sure, but believe me: the votes needed to pass this one-line bill changing a number to an arbitrary figure some billions or trillions in the distance would always be there.

http://www.guardian.co.uk/commentisfree/cifamerica/2011/jul/14/us-economy-debt-ceiling-law

We borrowed trillions of dollars.

As of Q1 2011, nominal GDP was 15.1 trillion. Currently the official debt, which includes intragovernmental debt like the SS and Medicare trust funds, stands at 14.3 trillion. But that is artificially low - the moment that debt limit is raised, it's going to go up to about 14.8 trillion. And then from there it keeps growing very fast.

Okay, Italy is in real trouble right now, and its debt/GDP ratio is about 118-119%. Ours is currently 95% and is going to reach 96-97% by the end of this year.

That's why this is an issue. We are only a few years away from a credit downgrade. As soon as people realize that we intend to keep borrowing, the interest rates we have to pay to borrow new debt are going to rise, and when they do, we are in deep shit.

This is not an artificial issue. They are deliberately holding this out until after the release of the Q2 GDP advance estimate, because that is going to raise nominal GDP quite a bit with our current inflation rate, so the numbers won't look so bad.