Geithner Shuffles Money, Keeps U.S. under Debt Limit

Posted by PITHOCRATES - May 16th, 2011

The Debt Ceiling Holds, Government Pension Funds Raided instead

Timothy Geithner warned the US Congress that it would be the end of the world if they did not raise the debt ceiling yesterday.  It was that urgent.  Here it is today and the world is still here.  Apparently they were fudging a little with the doom and gloom (see US reaches $14tn debt limit and cuts investments by the BBC posted 5/16/2011 on the BBC News Business).

Treasury Secretary Timothy Geithner has said that he will suspend investing into two large government pension funds.

This delays any breaching of the limit to 2 August…

The full amount of the suspended payments into the two pension funds will be restored if Congress raises the debt ceiling.

Before the Federal Reserve there was J. P. Morgan.  During the Panic of 1907, Morgan bailed out the U.S. banking system.  Because he could.  Because he was that rich.  And because he would.  He cared that much for his country.  People hated him, though, for his wealth.  Can you imagine anyone rich enough to bail out the United States?  Apart from a couple of government pension funds, that is.

Mr Geithner had previously set a deadline for a deal on increasing the debt ceiling to 8 July, but said that better tax receipts meant the deadline could be extended to 2 August.

An extension?  Guess things aren’t as bad as they’ve been saying.  Then again, this administration has not been very good with their forecasts.  The stimulus bill would, they promised, keep the unemployment rate under 8%.  Since that promise and the passing of the stimulus the unemployment rate passed 8 %.  9%.  And even 10%.  Briefly.  In fact, the more they seem to do the worse things seem to get.

In April, ratings agency Standard & Poor’s downgraded its US credit rating outlook from stable to negative, increasing the likelihood that the rating could be cut within the next two years.

Standard & Poor’s didn’t do this because they’re worried that Congress wouldn’t raise the debt ceiling.  They did it because they’re worried about the debt level of the United States.  For two reasons.  First of all, it has to be paid back.  Second, until it is, interest has to be paid.  And the larger the debt gets the harder it makes it to do these things.  In fact, it can get so bad that the treasury secretary could ask Congress to raise the debt ceiling because they have to borrow more to pay their bills.  And when you start borrowing money to pay the interest on your debt it makes creditors nervous.

An Economy still in Recession

And it’s not only Standard & Poor’s worried about the size of the debt (see Economists cut U. S. growth estimates because of fuel prices by Christina Rexrode, Associated Press, posted 5/16/2011 on USA Today).

A survey by the National Association for Business Economics predicts GDP will grow 2.8% this year — down from the group’s February prediction that it would grow 3.3%. Their outlook for consumer spending and the housing market also weakened, in part because they expect oil prices to remain above $100 a barrel through 2012.

In a survey the NABE released Monday, 41 economists also said they “remain highly concerned” about the growing federal deficit, and said growth the first three months of the year had been weaker than expected.

So GDP growth is weaker than first predicted.  Consumer spending is weak.  The housing market is weak.  And oil is still above $100 a barrel.  This is not how recession ends.  This is an economy in recession.  So the U.S. isn’t going to grow itself out of its deficit anytime soon by a surge of tax receipts from a booming economy.  And continued deficits will only add to the debt.  Further spooking the credit markets.

China Spooked by U.S. Growing Debt

So is anybody else nervous out there?  Any of our creditors?  How about the largest holder of U.S. Debt?  China.  If they aren’t worried then there’s probably nothing to worry about (see China cuts holdings of US Treasurys for 5th month by Martin Crutsinger, AP Economics Writer posted 5/16/2011 on Yahoo! Finance).

China, the biggest buyer of U.S. securities, trimmed its holdings for a fifth straight month.

The Treasury Department said Monday that China cut its holdings by $9.2 billion to $1.14 trillion.

And, of course, they’re worried.  At one time, China alone was financing the annual deficit.  Not anymore.  Something must have spooked them.  And it’s not that Congress may not raise the debt ceiling.  Few would doubt the world’s largest economy will be able to service its debt.  They have the money.  They may just have to transfer it from other spending.  Like from some government pension funds.  Clearly, though, the Chinese are not amused.  And that’s some pretty harsh criticism.  Especially considering that they’re a bunch of communists.

It’s not the Debt Limit.  It’s the Debt.

Have you ever missed a credit card payment?  And use your card only to see it declined?  What happens after you catch up on your payments?  You can use it again.  Maybe get a late payment fee.  No big deal.

Have you ever had a financial problem that you turned to your credit cards?  Run up a lot of debt fast?  And one day try your card and see it declined?  Getting that card turned back on isn’t as easy.  Why?  Because your creditors have lost faith in you.  Because your debt is so high that they have doubts that you’ll be able to service your debt.  Let alone pay it down.

This is kind of where the United States is now.  Creditors look at the spending and scratch their head.  They know the spending is growing out of control and needs to stop.  And yet the government spends more.  Telling them that the U.S government is not serious about getting their finances in order.  At this point it’s not raising the debt ceiling that concerns them.  It’s the debt.  In fact, they’d probably welcome a partial shutdown of the government and a missed interest payment or two.  Just to knock some sense into someone somewhere in Washington.

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