The US Debt Ceiling Theater Is Back: Think The Issue Is On Autopilot? Think Again

Tyler Durden's picture

As Zero Hedge reported first, the US is once again, in just 5 short months (see chart), back at the debt ceiling, with just $25 million in new debt issuance dry powder, or in other words, no space of more debt absent resorting to the same "technique" last seen in late July when the Treasury plundered from government retirement accounts in order to accommodate new debt, such as yesterday's issuance of 3 Year bonds, and today's 10 Year bonds. And as The Hill reported yesterday, Obama is expected to request that Congress allow the incremental and final $1.2 trillion debt expansion (of the $2.1 trillion total) within a few days. So it is all on autopilot right? Wrong. As Bank of America explains below, it is very likely that the US will not have a debt ceiling hike for at least a few weeks, meaning that while a debt hike will ultimately come, it will very soon be all the song in dance, potentially overtaking the GOP drama, coupled with the pillaging of government retirement accounts yet again and likely leading to more rating agency action as the US debt fiasco is once again brought front and center. And the last thing the market needs is to experience the August 2011 collapse which brought it to 2011 lows and sent it gyrating for 400 DJIA points daily, in essence breaking the market as noted previously. And the worst news is that even with $1.2 trillion in new debt capacity, the total amount is guaranteed to not last through 2013, and should tax withholdings dip as trends are already indicating on adverse year over year comps, the $1.2 trillion in new debt may be exhausted as soon as September, which at this point may be the only thing that derails an Obama reelection if indeed he is running against "Wall Street."

First, here is why the debt ceiling is called the debt target:

Bank of America explains why the "debt ceiling dance" is back.

An issue that will not go quietly

Just when the debt ceiling controversy seemed like last year’s news, it’s back. At the start of the year, the gap between the current debt outstanding and the debt limit narrowed to less than $100 billion. Under the terms of the August 2011 deal, that condition allows President Obama to request an increase in the debt ceiling. However, as we discuss in detail below, the President has delayed the request to allow a convoluted “debt ceiling dance” required under current budget law. As a result, the Treasury is preparing to take similar “extraordinary” steps as last year to  avoid hitting the ceiling. We expect a $1.2 trillion increase to become law in the end, but only after some noisy political theater — all of which should further add to the uncertainty emanating from Washington DC this year.

How it’s all supposed to go down

The Budget Control Act (BCA) of 2011, enacted last August, authorized two prior debt limit increases totaling $0.9 trillion, raising the ceiling to nearly $15.2 trillion. As of December 31, 2011, actual debt outstanding was less than $0.014 trillion below this limit — well within the $0.1 trillion (or $100 billion) threshold to allow the President to request an increase. (Since the quantities involved are so large, expressing everything as trillions helps to keep relative sizes in context.)

The process spelled out in the BCA for raising the debt ceiling goes like this:

  • Once the Treasury informs the President that the outstanding federal debt is closing in on the limit, he can request an increase from Congress.
  • Congress can then reject that request by majority vote in each house.
  • The President can respond with a veto to maintain the increase.
  • At that point, Congress can try to override the veto, which requires a two-thirds majority vote in both houses.

An inconvenient calendar

The wrinkle to these plans is that, according to the BCA, once the President makes the request to raise the debt ceiling, Congress has 15 days to hold a vote to reject it. If it fails to do so, the debt ceiling increase would occur regardless. However, the House is not back in session until January 17, while the Senate returns on January 23. Recall that the whole design of the BCA was to allow members — mostly Republicans — to symbolically vote “no” on the debt ceiling increase while allowing it to (eventually) pass and avoid a default. Thus, the President agreed to postpone his request not for economic or budgetary reasons, but to allow these legislative machinations to occur.

Back in the real world

In the meantime, the federal government must deal with the real consequences of fast approaching the debt ceiling (Chart 1). The Treasury is preparing to once again adopt so-called “extraordinary measures” to keep the government from running out of “headroom” on the debt ceiling. These basically involve temporarily halting issuance of non-marketable securities, such as for various government trust funds, to allow more marketable debt to be issued in order to pay for ongoing programs. Similar tactics were used not just last year, but also in 1996 and 2002 though 2004. These actions are likely to be just temporary band-aids until the debt ceiling is actually raised.

Securing the no votes

The unwieldy structure of the BCA is the result of a compromise agreement among disparate policy factions – it hardly represents optimal fiscal policy. This condition of at least dollar-for-dollar future deficit reduction in exchange for increasing the debt ceiling was one key component to get Republican support for the BCA. Another was to grant both houses of Congress a vote on the proposed debt ceiling increase. This allows members to be on-record of voting against it. Last week, Republican Senator Marco Rubio (Florida) released a letter highly critical of President Obama’s handling of the issue and promising to vote against the increase. Political consultants suggest that most Republicans will vote against the President’s request — once Congress is back in session.

It also means that we will probably go several weeks before another $1.2 trillion increase in the debt ceiling is adopted, mostly likely because the process will take time to play out. That said, we see no scenario in which the debt ceiling is not raised, or in which there is any meaningful risk of default. We suspect that the opposition may die in the Senate, given that Democrats still have a majority. There is no expectation that either the House or the Senate will be able to muster enough votes for a veto override. But, in the meantime, the rhetoric should be just as heated as last summer’s debt ceiling debate.

It’s the process, stupid

It is worth remembering that the amount of outstanding debt is determined directly by current and past budget deficits, so no amount of future promised deficit reduction will change the near-term need to raise the debt limit. That fact, unfortunately, is likely to be completely lost in the current debate. Indeed, the convoluted process required to raise the debt ceiling is just another example that little substantive is likely to be accomplished in Washington DC this election year — it is designed for political showmanship, not for difficult but needed bipartisan forward progress on the long-term budget.

Thus, a better solution than freezing the debt limit would seem to be to reform the budget process so that changes to the debt ceiling must be passed along with spending and revenue decisions — as part of the budgeting process, and within the appropriation bills. In that way, politicians would be held accountable for budgetary choices that increase debt issuance when they are made. Unfortunately, this approach has been tried before, and Congress found ways to circumvent its own self-imposed rules. Thus, we are likely to revisit this debate on a regular basis, including in early 2013, after the new Congress convenes. This marathon dance still has a long way to go.

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Caviar Emptor's picture

The Debt Ceiling is our little family dispute. We secretly love it! We've learned to love so many things lately


MillionDollarBonus_'s picture

This is no laughing matter Caviar. The debt ceiling was a very dangerous idea from the start and has been the subject of much controversy among top Ivy League economists. The Nobel Laureate, Dr Paul Krugman, summed it up nicely when he said:


Think about it. There’s a significant chance that failing to raise the debt limit could provoke a renewed financial crisis — and Republicans would rather take that chance than allow a reduction in tax breaks on corporate jets.


The debt ceiling is one of the most clear and present dangers to American freedom, liberty and prosperity and the sooner it is abolished the sooner we can start passing some serious fiscal stimulus programs to boost aggregate demand. Never underestimate America - this country is HUNGARY to spend, we just need credit. However, provision of this credit will require cooperation and maturity from both congress AND our Federal Reserve, which I'm sorry to say have been lacking as of late.


Mr Lennon Hendrix's picture

WGT, Dotor of economics, doesn't believe we need a debt ceiling either.  Yet the problem is not whether there is a ceiling or not, the problem lies under the floor at the foundation.  The problem is the house is built on a lie that Fiat is monie, and that these IOUs have intrinsic value; they do not.

MillionDollarBonus_'s picture

Many libertarians correctly point out that fiat currencies are not 'backed' by anything, but gold is not backed by anything either. Money is just a tool, and fiat money is a more useful tool than gold, because it allows the credit supply and interest rates to be set by experts rather than the subjective preferences of quaint and ill-informed market participants. I am personally thankful that we have some of the smartest people in the world setting interest rates for Americans, rather than the general rabble. 

Mr Lennon Hendrix's picture

Gold meets all standards of the definition of monie.  It does not need to be "backed" with anything, because it is something, and that something is monie.

Your view on the experts- have they done a good job?  Could they not have done much much better?

MillionDollarBonus_'s picture

They are the best people for the job since they were either elected or appointed by elected officials. In order to get elected, politicians must survive the scrutiny of a well informed and objective constituency. People cannot be trusted to run their own lives or give to the poor, however we CAN trust them to vote for people to do these things instead.

xela2200's picture

MillionDollarBonus, are you missing the /sarc tag? Not even the forefathers trusted government, and they form one.

Conrad Murray's picture

Didn't trust government, but formed one. Didn't like slavery, but owned some. Old white hypocrites. Same as it ever was.

snakeboat's picture

the sarc tag has been replaced with the MDB tag by the W3C.  they had to do it.  dinut ya get the memo?  

Saro's picture

MDB, you are a ZH treasure.  Never change.

Eternalko's picture

In my country, such people called elves :) You know, living in Laplandia with ponies and fairies :)

Mr Lennon Hendrix's picture

They are the best people for the job since they were either elected or appointed by elected officials.

Appeal to authority- fallacy.

HoofHearted's picture

Absolutely beautiful. I think you forgot to attribute the quote to one Barack Hussein Obama, though.

His was more to the point, "I won. Elections have consequences."

And we're all fucked royally.

Fukushima Sam's picture

Lol, dude.  Fuckin' LOL!

Giving you a down but you know I mean up.

Swarmee's picture

-slow clap- effing brilliant.

It took me a while to appreciate the dead pan of your trolling but now I realize it is to be enjoyed like a Michael Bay film. Don't think too hard, just marvel at the pretty explosions.

PuppetRepubl1c's picture

It was a brilliant Troll executed flawlessly

xela2200's picture

Yes, completely agree. The problem is with monetary responsibility. Gold is limited but paper can be printed at infinitum. All systems that require the human element tend to fail because of greed or corruption or even good intentions with full morals.

John_Coltrane's picture

Hey MDB, you're a real hoot!  Keep up the great satire.  Citing Krugman, one of the greatest idiot savants in the universe is very clever.   Of course, gold is finite, fiat potentially infinite, so that's the real difference isn't it?  And whenever you have a limited supply of anything its more valuable (just watch the antiques road show).

Nothing To See Here's picture

Top - Ivy League - Economist

Sounds like the idea of top-gun-actors in Team America World Police.

LetThemEatRand's picture

While a number of conservative activists have frequently

used starve the beast as a justification for tax reductions, this

theory has received support from some economists. The most influential

academic proponent of starve the beast is Milton Friedman.

Friedman (2003) argued that, if taxes are cut, “the resulting deficits

will be an effective restraint on the spending propensities of the

executive branch and the legislature.” Other leading economists who

have voiced support for starve the beast include Harvard University’s

Robert Barro (2001) who argued, “Tax cuts remove tax revenues

from Washington and keep Congress from spending them.”

The first mention of starve the beast as it relates to the federal

budget was in a 1985 Wall Street Journal article where an unnamed

White House official felt that the Reagan administration had not

done enough to cut spending: “We did not starve the beast,” the official

said (Blustein 1985). However, the ideas behind starve the beast

have had some currency in mainstream political discourse since the

late 1970s. For instance, columnist George Will (1978) supported

the enactment of the Kemp Roth tax reduction bill in 1978 because

he thought “it would restrain the predictable growth of government

that is financed by windfall revenues.” Similarly, during the 1980

presidential debates Ronald Reagan argued that tax reductions

would stop spending growth saying, “If you’ve got a kid that’s extravagant,

you can lecture him all you want to about his extravagance. Or

you can cut his allowance and achieve the same end much quicker”

(Mallaby 2006).


Jadr's picture

While this thesis "makes sense" to a casual observer, in our current reality it seems to be at best, a very ineffective strategy due to the ease of deficit financing by governments.

Melin's picture

I find the /sarc thing a bit of a cop out.  Effective sarcasm needs no announcement. 

Cole Younger's picture

? Huh ???.... 15 trillion in debt that mathmatically can never be paid is not enough? If the government continues down this path of spending and taking on more debt, the U.S. dollar will become the laughing stock of the entire world and will be worth zero. How does that help?

Eternalko's picture

The debt is money and money is debt. It is ok to have huge in order to have lots of money. All aggregates.


But there is big but. The debt should be at affordable rates and the economy as a whole should develop. If it doesn't it produces less, so it needs less money, so the debt will chain devour excess money from the market.

Chuck Walla's picture

Yes, that laughing jackal, Krugman, and Corp jets. What is that, like $800k a year? One wonders why Obama insisted that cut be in the Stimulus bill in the first place, doesn't one?

SomethingWicked's picture

. . .Because it makes a good media sound byte, and gets everyone on both sides rabid with anger.


You know. . .political Jerry Springer.

game theory's picture

Our third-step-cousin China is also at the family dispute now; and he is rapidly coming to the conclusion that America likes cathedral ceilings. 

55 men's picture

I am so glad they raised it, I was concerned that the last time they raised it, it wasn't enough. Lets all pray that they can raise it enough so they can get their paychecks.

In case you missed this, here it is again

SheepDog-One's picture

Gee, so someday this 100+% debt/GDP ratio might actually become a real issue? 

Caviar Emptor's picture

Starting soon US debt will be rated "Great" "Outstanding" or "Fantastic" only, no more of these embarrassing numerical labels

SheepDog-One's picture

100% debt/GDP, and US debt is still only 1 notch below perfect!

HoofHearted's picture

Makes one wonder why they have savings in silver and gold, doesn't it? I wish I still had my stack that got lost in that awful boating accident...

Rastadamus's picture

Take the entire House of Representatives and whore them out for 6 bucks a nut.

ShankyS's picture

Better not go there with the PSU case about to enter full bloom (plus I think they get $6k per nut already). 

sheeple2012's picture

Just raise it to 20 Trillion so we don't have to worry about it until ... next year?

Everybodys All American's picture

Vote for no debt ceiling increase and let the train slow to a crawl rather than wreck later if the ceiling is raised. Yea that'll happen.

SheepDog-One's picture

'Congress can take this action, then that action to over-ride the president'....LOL hasnt anyone been paying attention? The 'president' just announced he has no further use for the congress, doesnt need them anymore, and the crowd went WILD with applause!

Everybodys All American's picture

same in Venezuala a few yrs ago.

Killtruck's picture

But...but...but...we got to symbolically vote "no"!

I want some bread. Maybe a circus or two.

GeneMarchbanks's picture

That chart if funnier than BAC's credibility.

Irish66's picture

It's credible due to the fact that they read all the comments on Zero Hedge yesterday

and wrote this piece.  


pods's picture

Well just checked and BAC is back where it should be, right at $6.66.

It is just happier there, don't know why.


Shizzmoney's picture

I secretly want this thing to go on longer than the summer....but it won't for the sake that it is an election year.  When Paul Ryan, a key architect of SOPA, withdraws usually means one thing: "I'm up for re-election and I am in a dog fight" (unlike Lamar Smith, who is a career pol and would win no matter what).

But, to say it CAN'T happen, isn't prudent.  But you'd think that any start of debt collapse wouldn't happen til; after the Super Bowl.  If that got cancelled somehow, the people might actually start caring about htis crap.


Woodyg's picture

People might actually care..... But frankly why give a crap when it's 1 party pretending to be 2 opposing parties.......

People see that shit and tune out......

Kaiser Sousa's picture

and the phony paper game n Gold & Silver continues....

so fucking tired of this bullshit....can we c $60 Silver already god dammit....

Blank Reg's picture

Oh GOD yes! This waiting crap is torture. We all know how this will end (tears and recriminations). Let's just be done with it. I WANT MY MUNY!