Obama and Congress Agree To Raise Debt Ceiling to $120 Trillion

Sen. Everett Dirksen on increasing the federal debt (1965)

HAT TIP: Unconfirmed Sources
by NickFun

Complicated graphs and charts prove the country is now just fine.

President Obama and Congress breathed a collective sigh of relief today as Obama signed into law a budget agreement that would raise the federal debt ceiling from it's current $12 trillion to $120 trillion.

"The country's finances are now in excellent shape", an upbeat Obama said in a prepared statement. "We now have plenty of money for education, health care, social security, NPR and funding for the wars".

House Republicans were initially against raising the debt ceiling until Mitch McConnell, the Senate Republican leader, reminded congress that without the removal of the debt ceiling congress would have to be shut down and they would be unable to vote themselves pay raises.

The President said he has a plan to have the country fiscally sound by the time the $120 trillion debt limit has been reached, which will probably be in about 10 years.

"We will start slowly paying our bills", Obama stated. "We will find ways to reduce the deficit as time goes on but let's enjoy the economic prosperity we have now found!"

Some people interviewed were skeptical of the new plan. "If I go a hundred bucks in debt I have creditors crawling up my ass!" said Ventura California bartender Melvin Grace. "Why can't I go at least a few thousand into debt and be OK?"

"You do as we say, not as we do", Obama reminded Grace.

Oh Canada!

On debt, Canada shows us the way out

Washington Post

By Charles Lane | February 2, 2010; 12:11 PM

Wondering how seriously to take the Obama administration’s claims that its new $3.8 trillion budget plan represents fiscal restraint? Look northward, to Canada. Compared to the belt-tightening that government imposed on itself in recent years, Obama’s effort appears trivial indeed.

A new report from McKinsey Global Institute, “Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences” tells the story. As of 1998, Canada’s total debt -- the combined obligations of government, households, financial and non-financial corporations -- stood at 240 percent of gross domestic product, up 44 percentage points from the 1988 level. Government, both provincial and federal, was responsible for much of the increase. And so government, especially the federal government under the leadership of Paul Martin, who served first as finance minister and then prime minister, led the way in debt reduction.

Ottawa cut farm and business subsidies, scaled back social programs (including health care) and eliminated 55,000 public sector jobs. Interest groups howled. But these measures reduced government debt from 84 percent of GDP in 1998 to 58 percent of GDP in 2005. By contrast, Obama’s latest plan contemplates growth in the U.S. federal debt from 53 percent of GDP last year to 77 percent in 2020. Chrystia Freeland and Paul Krugman have recently sung the praises of Canadian bank regulation, which kept the debt of its financial institutions down to a dull roar. Yet timely fiscal discipline is also a major reason that Canada has been able to confront the global downturn in the best overall financial shape of any major industrial country.

“Canada’s deleveraging episode provides a model for countries with highly indebted governments today,” the McKinsey Global Institute report notes. “The key requirement was the political will to force through unpopular government spending cuts.” Still no sign of that will in Washington.

The National Debt explained in a way we can all understand.

Economic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its economic growth. Countries at early stages of development have small stocks of capital and are likely to have investment opportunities with rates of return higher than those in advanced economies. As long as they use the borrowed funds for productive investment and do not suffer from macroeconomic instability, policies that distort economic incentives, or sizable adverse shocks, growth should increase and allow for timely debt repayments. These predictions hold up even in theories based on the more realistic assumption that countries may not be able to borrow freely because of the risk of debt repudiation.

Why do large levels of accumulated debt lead to lower growth? The best-known explanation comes from "debt overhang" theories, which show that if there is some likelihood that, in the future, debt will be larger than the country's repayment ability, expected debt-service costs will discourage further domestic and foreign investment and thus harm growth. Potential investors will fear that the more a country produces, the more it will be "taxed" by creditors to service the external debt, and thus they will be less willing to incur costs today for the sake of increased output in the future. This argument is represented in the debt "Laffer curve" (Chart), which posits that larger debt stocks tend to be associated with lower probabilities of debt repayment. On the upward-sloping or "good" section of the curve, increases in the face value of debt are associated with increases in expected debt repayment, while increases in debt reduce expected debt repayment on the downward-sloping or "bad" section of the curve.



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