Blog Archives

The President’s Legal Authority at the Debt Limit

By Andrew Kloster

Some time between the middle and the end of October, the federal government will reach a hard limit on the amount of debt it can issue, and its ability to finance governmental operations will be affected. Confusion about the debt limit abounds, and this Issue Brief will address some common questions.

What Is the Debt Limit?

The United States debt limit, or debt ceiling, is the statutorily defined amount of debt the U.S. Treasury can issue, either by borrowing from the public or issuing an intragovernmental receipt to special accounts, such as the Social Security or Medicare trust funds.[1]

The Treasury Department has to have liquidity, or cash on hand, to disburse the funds necessary to meet its contractual obligations. The federal government maintains this liquidity by managing governmental receipts (such as income tax payments) and selling debt (such as Treasury bonds).

Will a Government Shutdown Occur If the Debt Limit Is Not Raised?

The debt limit is often confused with the expiration of appropriations bills. Reaching the debt limit is distinct from a government shutdown. A government shutdown occurs when appropriations authorization expires: Unless there is a law saying that money may be spent on a project, money may not be spent on that project.[2] A debate over an appropriations bill is a debate over whether to fund a specific government function. When the government shutdown began, only certain statutorily defined “essential” government functions have continued to operate.[3]

The debate over the debt limit, however, is a debate over how to finance governmental operations—reaching the debt limit would not force a government shutdown. Currently, the debt limit is $16.699 trillion.[4] The federal government reached this limit on May 19, 2013, and Treasury has since used statutorily allowed “extraordinary measures” to avoid issuing additional debt and still have the cash on hand to finance day-to-day operations. When the Treasury exhausts these extraordinary measures, the federal government will continue operating. However, the President might decide that federal employees, for example, will not necessarily be issued checks available to cash immediately.

Even without the ability to issue additional debt, the government will continue to accrue legal obligations; it will simply not be able to immediately liquidate (pay cash for) those obligations.[5]

What Happens to the U.S. Debt If We Reach the Debt Limit?

It is impossible to tell what would happen if the debt limit is not raised.[6] If Congress and the President are unable to reach an agreement on raising the debt ceiling, markets and credit rating agencies might interpret this negatively as unwillingness of the U.S. government to honor its obligation. If the President chooses to default on all obligations rather than a few (discussed below), this could exacerbate the problem. Market perception of U.S. sovereign debt directly affects bond yields (interest rate paid) on U.S. debt, so decisions the President makes can actually save or cost the government money in the long term.

The Prompt Payment Act[7] provides that the “temporary unavailability of funds to make a timely payment” does not excuse delayed payment and that the government is responsible for paying interest charges on such delayed payments. Over time, these interest penalties capitalize, so the federal government ends up paying compound interest. Depending on how the President manages payments, statutory interest payments may be greater or smaller.

What Would the President Prioritize?

While there have been proposals to cabin the authority of the executive to prioritize payments,[8] as it stands there is no statute governing how to manage government finances past the debt limit. Since governmental obligations would exceed receipts, exceeding the debt limit logically implies that at least some obligations would be delayed. These obligations would thus, by definition, be in default. There is no general “governmental default” past the debt limit; default would occur with respect to specific obligations that the President chooses not to prioritize.

There are constitutional backstops on the President’s otherwise plenary authority to prioritize payments.[9] Of these, the most important is that the President may not prioritize payment in violation of the Due Process Clause of the Fifteenth Amendment. He may not, for example, choose to pay the salaries of federal employees of one race before paying the salaries of federal employees of another race. Subject to this limitation, the President’s prioritization choices are essentially unbounded.

The President could, of course, play a game of political brinksmanship and fail to pay any obligations until the debt ceiling is raised. He could argue that all obligations are on an equal footing and that prioritizing payments violates some principle of fairness. Former Treasury Secretary Timothy Geithner made statements about the political unworkability of prioritization in the past,[10] but to date, Treasury has not disavowed its legal authority in this area. Failing to prioritize debt obligations would have far-reaching consequences, however, including potentially increasing the cost of servicing the debt long after the debt limit crisis ends.

Further, to the extent that this situation would involve having cash on hand and failing to pay some receipts, this option implicates the Congressional Budget and Impoundment Act of 1974, which prevents the President from deferring any “budget authority.” This phrase is defined to include “borrowing authority, which means authority granted to a federal entity to borrow and obligate and expend the borrowed funds.”[11] Holding cash until such time that the Treasury can meet all of its payments necessarily includes deferring expenditures of borrowed funds until such time as the debt ceiling is raised, which would implicate these statutory limitations.[12]

The President could also choose to continue payments for “essential” services analogous to those defined in the appropriations context.[13] There is no statutory requirement for this decision, but the idea that there are “core” functions of the federal government that ought to remain liquid is easily understandable. Meeting debt obligations and paying military personnel might be prioritized at the expense of other obligations, such as issuing certain grants and loans to private-sector firms and to state and local governments, for example. So-called mandatory spending, such as Social Security payments, do continue during a government shutdown, but they need not be prioritized at the debt limit.[14]

The President could also pick and choose among programs he likes and those he does not like. He might direct Treasury to pay Department of Defense employees before Department of Education employees, or vice versa. Whatever decision he makes would be essentially unchallengable in court.

Ultimately, however the President chooses to manage payments, delays will accumulate and worsen until either spending is cut or the debt ceiling is raised.

Broad Authority

In brief, the President has broad authority to manage government payments to avoid defaulting on federal obligations. He can choose which payments to make and in which order, and these choices will impact the effects on the average U.S. taxpayer and the economy.

—Andrew Kloster is a Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.

Show references in this report

Source

Audit of the Federal Reserve Reveals $16 Trillion in Secret Bailouts

unelected.org
Sat, 01 Sep 2012 01:33 CDT

The first ever GAO (Government Accountability Office) audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill(HR1207), so that a complete audit would not be carried out.

Ben Bernanke (pictured to the right), Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve’s nearly 100 year history were posted on Senator Sander’s webpage earlier this morning.

What was revealed in the audit was startling:

$16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious – the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is “only” $14.5 trillion. The budget that is being debated so heavily in Congress and the Senate is “only” $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.

In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion.

“This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”- Bernie Sanders (I-VT)

When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.

Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and supercorporations like Halloween candy. If the Federal Reserve and the bankers who control it believe that they can continue to devalue the savings of Americans and continue to destroy the US economy, they will have to face the realization that their trillion dollar printing presses will eventually plunder the world economy.

The list of institutions that received the most money from the Federal Reserve can be found on page 131of the GAO Audit and are as follows..

  • Citigroup: $2.5 trillion ($2,500,000,000,000)
  • Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
  • Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
  • Bank of America: $1.344 trillion ($1,344,000,000,000)
  • Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
  • Bear Sterns: $853 billion ($853,000,000,000)
  • Goldman Sachs: $814 billion ($814,000,000,000)
  • Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
  • JP Morgan Chase: $391 billion ($391,000,000,000)
  • Deutsche Bank (Germany): $354 billion ($354,000,000,000)
  • UBS (Switzerland): $287 billion ($287,000,000,000)
  • Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
  • Lehman Brothers: $183 billion ($183,000,000,000)
  • Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
  • BNP Paribas (France): $175 billion ($175,000,000,000)

and many many more including banks in Belgium of all places

View the 266-page GAO audit of the Federal Reserve (July 21st, 2011):

Sources:
US Government Accountability Office (GAO)
FULL PDF on GAO server.
Senator Sander’s Article

Audit of the Federal Reserve Reveals $16 Trillion in Secret Bailouts — Puppet Masters — Sott.net.

Another Economic Collapse and Great Depression are Coming! Here’s Why

https://i0.wp.com/www.munknee.com/wp-content/uploads/2011/07/crisis.jpg

It really is hard to find the words to describe the true horror of the national debt of the U.S.

Sunday, July 31st, 2011

The U.S. government has been on the greatest debt binge in all of human history, and a day of reckoning is coming that is going to be so painful that it is going to shock America to the core. [Let me explain further.

So says an article* at TheEconomicCollapseBlog.com which Lorimer Wilson, editor of munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  The article goes on to say:

We have lived so far above our means for so long that none of us really has any concept of what “normal” is like anymore.  The United States has enjoyed the greatest party in the history of the world, but now this decades-old party is ending and the bills are coming due.  Our current system is headed for an inevitable collapse.  There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready.

It was Dick Cheney who famously said that “deficits don’t matter”.  Well, try telling that to the nation of Greece right about now.  The horror that Greece is just beginning to experience is a preview of what is going to happen to us as well.  Only when it happens to us it is going to be so much worse, because when we go down we are going to bring the entire global financial system down with us.

What we have done to future generations is beyond sickening.  Previous generations entrusted to us the greatest economic machine in the history of the world and we destroyed it.  Now we are leaving to our children and our grandchildren an economic future that has been totally wiped out and a national debt of more than 14 trillion dollars that we expect them to repay.

In Washington D.C. these days, there is a lot of talk about the debt ceiling but whatever the politicians do, it is not going to solve our debt problems.  If the debt ceiling does not get raised, we move the financial pain into the present.  World financial markets would crash and that would be followed by a devastating economic nightmare. If we do raise the debt ceiling, that will “kick the can down the road” a little bit farther.  However, world financial markets will still crash eventually and our eventual economic nightmare will be even worse.

Who in the world is currently reading this article along with you? Click here to find out.

Can’t we just “inflate our way” out of debt? No, unfortunately things are just not that easy.  If we try to inflate our way out of debt, interest rates will likely rise just as quickly as inflation does, and that would be absolutely catastrophic. Before interest rates even reached 20% we would hit a point where it would take every single dollar taken in by the federal government just to pay the interest on the national debt. Meanwhile, rapidly rising inflation would devastate the value of all of your bank accounts and every other single financial asset that you own. So no, inflating our way out of debt is not going to work.

At the moment, the U.S. federal government is able to borrow gigantic quantities of money at super low interest rates – but when that changes, all hell is going to be unleashed.

[Below is an abbreviated list of 25] statistics about the national debt that are almost too crazy to believe:

  1. As of June 20th, the U.S. national debt was $14,344,524,186,068.19 [see here for today’s number] yet 30 years ago the U.S. national debt was approximately 14 times smaller.
  2. It took from the presidency of George Washington to the presidency of Ronald Reagan for the U.S. government to accumulate one trillion dollars of national debt yet since then we have added more than 13 trillion dollars of additional debt.
  3. During Barack Obama’s first two years in office, the U.S. government added more to the U.S. national debt than the first 100 U.S. Congresses combined.
  4. The U.S. national debt is currently rising by well over 4 billion dollars every single day with the U.S. government borrowing over 2 million more dollars every single minute.
  5. The combined debt of the major GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to 6.4 trillion in 2011 [which,] thanks to George W. Bush, Barack Obama and the U.S. Congress, U.S. taxpayers are guaranteeing.  This is debt that is not even included in the $14.3 trillion national debt figure.
  6. Interest on the national debt and mandatory spending on entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019.
  7. Between 2007 and 2010, U.S. GDP grew by only 4.26%, but the U.S. national debt soared by 61% during that same time period.
  8. The U.S. national debt has increased in size for 54 years in a row.
  9. If you divide up the national debt equally among all U.S. households, each one owes over $125,000 and it has gone up by $29,660 per household since Barack Obama signed the economic stimulus law.
  10. The U.S. government spent over 413 billion dollars on interest on the national debt during fiscal 2010 and it is projected that by the year 2021, interest payments on the national debt will amount to $1.1 trillion dollars a year.
  11. U.S. national debt will rise to about 400 percent of GDP by the year 2050.
  12. Some experts estimate that the unfunded liabilities of the U.S. government for programs such as Social Security and Medicare are in the neighborhood of 60 trillion dollars.  Other experts claim that the total for federal government unfunded liabilities could be well over $100 trillion but what almost everyone agrees on is that it is going to be virtually impossible to even come close to meeting all of those obligations.
  13. Approximately one out of every four dollars that the U.S. government borrows goes to pay the interest on the national debt.
  14. The U.S. government currently has to borrow approximately 41 cents of every single dollar that it spends.
  15. If interest rates were to move back to 5% (2006 levels) it would increase annual U.S. interest expense by almost $700 billion annually. This is against current U.S. government tax revenues of $2.228 trillion (CBO FY 2011 forecast).
  16. If the U.S. government was forced to use GAAP accounting principles (like all publicly-traded corporations must), the U.S. government budget deficit would be somewhere in the neighborhood of $4 trillion to $5 trillion each and every year.
  17. Mandatory federal spending is going to surpass total federal revenue for the first time ever in this fiscal year.  That was not supposed to happen until 50 years from now.
  18. In 1980, government transfer payments accounted for just 11.7% of all income.  Today, government transfer payments account for 18.4% of all income.
  19. U.S. households are now actually receiving more money from the U.S. government than they are paying to the government in taxes.
  20. 59 percent of all Americans now receive money from the federal government in one form or another.
  21. Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, one out of every 6 Americans is on Medicaid.
  22. Back in 1950, each retiree’s Social Security benefit was paid for by approximately 16 workers.  Today, each retiree’s Social Security benefit is paid for by approximately 3.3 workers.  By 2025 it is projected that there will be approximately two workers for each retiree.
  23. Back in the 1950s, corporate taxes accounted for about 30 percent of all federal revenue.  In 2009, corporate taxes accounted for just 6.6 percent
  24. The total compensation that the federal government workforce earned last year came to a grand total of approximately 447 billion dollars.
  25. The level of government waste in this country is absolutely mind blowing. For example, the Department of Health and Human Services has just announced a brand new $500 million program that will, among other things, seek to solve the problem of 5-year-old children that “can’t sit still” in a kindergarten classroom. In the past, the U.S. government has spent $2.6 million dollars to study the drinking habits of Chinese prostitutes and $400,000 dollars to pay researchers to cruise bars in Buenos Aires, Argentina to find out why gay men engage in risky sexual behavior when drunk.

The national debt is a problem that should have been handled 20 or 30 years ago but it wasn’t so now what we have to look forward to is a very bleak future.  Even if we totally scrapped our current monetary system and repudiated the debt, the transition would be “rocky” at best and we would not enjoy anything close to the standard of living that we are enjoying today.

Unfortunately, [however,] the vast majority of our politicians in Washington D.C. would never even dream of abandoning the current system [even though they] are now admitting that our current state of affairs is “unsustainable”.  They just don’t have the guts to do anything about it.

[As such,] this current system is headed for an inevitable collapse.  There is no way of getting around it – a horrific economic collapse is coming [and] it is going to change the world. You better get ready.

National Debt

Related Articles:

  1. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why
  2. Get Ready: Economic Hell is Coming!
  3. How to Restore Fiscal Sanity to the USA
  4. We Have Fallen Head First Into An Economic Abyss! Here’s Why
  5. Americans Are Hurting And It’s Going To Get Worse – Here’s Why
  6. The U.S. is Headed Towards Self-inflicted Disaster: Here’s Why
  7. IMF: Major Changes Required to Close U.S. Fiscal Imbalance – Here’s Why, What and How
  8. America: The Party is Over! Here’s Why
  9. Weiss: A Financial Apocalypse Awaits America!
  10. Is the Bankruptcy of the US and the UK Unavoidable?
  11. America’s Political Process Guarantees Another Financial Crisis!
  12. Washington Faces Possible Armageddon Unlike Any Since Civil War
  13. Americans Have Thrown in the Towel as They Await “The Big Splatter”
  14. Remedies to Fiscal Gap Guarantee Hyperinflation!
  15. Warning Signs Suggest U.S. Headed for a Complete Societal Collapse!
  16. Let’s Get Real: The U.S. is Bankrupt and the Consequences Will Be Dire!
  17. U.S. Between a Rock and a Hard Place and Its Options Are – At Best – Dire!
  18. Will the Fed Engineer a Stock Market Crash to Flood the Bond Market With Much Needed Demand?

Editor’s Note:

  • The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  • Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Related Posts:

%d bloggers like this: