The Feds have two ways to pay for their many many expenditures. One is taxes, the other is borrowing. Right now taxes are high enough to pay for about 60 odd percent of the federal budget, and the other 40 percent comes from borrowing.
The Feds borrow money by selling Treasury bonds (T-bills). The bonds are a promise to repay the money borrowed within a fixed period, so many years. The United States has an excellent credit rating. We have never defaulted on our bonds, and the US dollars are good money all over the world, mostly because the Americans will sell nearly everything that exists for US dollars. We have product on the shelf, ready to ship, or we will make it to order. This is far better than the Russians ever did, all the Russians have to sell is crude oil, and most of their manufactured goods are so shoddy that nobody will touch them for any money. We have stuff like jet airliners that you cannot get just anywhere. We have top notch pop performers; we have best selling movies, best selling books, unbeatable tourist attractions, and stylish clothes, everything you can imagine.
My old economics text called T-bills “near money”. They are almost as good as money, there is a 5 day a week, 8 hours a day market in which you can sell your T-bills for real cash. An investor can buy T-bills and not feel he is any poorer, he thinks of T-bills as nearly as good as cash, and convertible to cash in a couple of business days.
And so, to keep some limits on things, there is a federal law, the debt limit, that puts a hard limit on the amount of T-bills the federal government can sell. Every so often as the feds borrow more and more, we raise the debt limit. Such a time is upon us, the US treasury is saying they will hit the debt limit this month. The Democrats don’t have the votes to pass a debt limit hike; they need some Republican votes to go along. The Republicans, looking at the Democrats plans to pass $3.5 TRILLION (or maybe more, depends on how you count it) worth of pork and welfare, are saying “We won’t vote to hike the debt limit”.
The Democrats are crying that without a debt limit hike the US will default on its bonds. This is malarkey. Federal debt service (mostly paying off T-bills as they come due) is like 10 percent of the federal budget. Taxes are enough the pay 60 percent of the federal budget, so paying the debt service is no real problem. What will be a problem is deciding what to cut once the Treasury can no longer raise money by selling T-bills. We are talking about 40 percent of the federal budget, a handsome chunk of change. We can furlough most of the federal bureaucrats, stopping their pay. We can stop paying for a lot of welfare and school lunches and other freebies. We could stop federal highway subsidies, farm program price supports. We will have to keep paying social security benefits because of the political outcry that would occur if social security went away. We probably need to keep paying the armed forces, we may need them badly.
