Is the debt ceiling relevant to prepping? I would think so. One of the most likely possible “disasters” that we might face in the near or distant future is severe economic adversity: high unemployment, high inflation, and the collapse of social safety net programs from federal and/or state government. The burgeoning U.S. national debt could easily contribute to this type of dire economic adversity. And if an economic disaster scenario is possible, likely, or already unfolding, we need to keep informed.
Just as is the case with any individual’s finances, constant borrowing and sharply increasing debt can result in a situation in which the individual cannot possibly pay what is owed. For the individual, the result is personal economic collapse, but for a nation, the effects would be much more severe and widespread. I don’t think anyone knows for sure what all the consequences would be if the U.S. were to default on its debts.
The debt ceiling is a legal limit to the amount of money that the U.S. government can borrow (by issuing treasury bonds). The U.S. Treasury Department describes it this way:
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past. (treasury.gov)
When do we hit the debt ceiling? On 31 December 2012, the U.S. officially hit its borrowing limit. How soon will the U.S. go into default? The current estimate is between February 15 and March 1, 2013, according to businessinsider.com. If Congress does not pass a law raising the debt ceiling before then, the U.S. could go into default. No one can say what the exact date of default will be, since the U.S. constantly has revenue coming in, and expenditures going out, but these amounts vary based on many factors.
How bad would it be? Treasury.gov says:
If Congress fails to increase the debt limit, the government would default on its legal obligations – an event unprecedented in American history…. If Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments. Defaulting on those legal obligations would cause severe hardship for American families. Additionally, it would call into question the full faith and credit of the United States government – a pillar of the global financial system. The ensuing financial crisis from a default would have catastrophic economic consequences, potentially including the loss of millions of American jobs. And it would lead to higher borrowing costs, reduced retirement savings, and lower home values for families across the nation. (Debt Limit: Myth vs. Fact)
But wait… there is a clever way to avoid this crisis: the U.S. Mint could mint a single platinum coin, with a face value of one trillion dollars. I kid you not. The idea has been floated by business commentators and several legislators. Then, at a recent press conference (9 Jan 2013), Whitehouse spokesperson Jay Carney was asked about the idea. Most observers expected him to rule out the idea. He did not. Whiskey Tango Foxtrot.
The NY Times describes the idea this way:
The workaround would come from exploiting a 1997 law that allows the Treasury to “mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the secretary, in the secretary’s discretion, may prescribe from time to time.”
Rather than selling it, he [the Treasury Secretary] might deposit it at the Federal Reserve. Presto! The shiny new asset would erase a trillion dollars in debt liabilities. Then, the Treasury could carry out its spending — including disbursing Social Security checks and Medicare payments — without hitting the ceiling, a cap on total debt issuance that currently stands at about $16.4 trillion. (NY Times)
Sound absurd? Yes, but it would be better than going into default and wrecking the U.S. and possibly the world economy.
UPDATE The Treasury Department has now rejected the idea of a trillion dollar coin: “Treasury Department spokesman Anthony Coley said the agency wouldn’t mint one and the Federal Reserve would not accept the coin.”
Post Script: Sounds like a good idea for a movie. The U.S. mints a trillion dollar coin. A group of bungling ne’er-do-wells steal it, and try to cash it, sell it, or hold it hostage. But I’m not sure if the plot is a comedy or a tragedy.