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The Daily Need

Moody’s: You know what? Just scrap the debt limit altogether

Moody’s Investor Service has once again warned the United States government that it might lose its AAA bond rating if it can no longer meet its obligations to creditors, which will happen soon if lawmakers fail to raise the statutory debt limit by August 2. In issuing that admonition, Moody’s has also proposed a novel solution, of sorts, to the current impasse over the debt ceiling: Just get rid of it.

Constitutionally, only Congress can approve the issuance of debt to fund government spending. When it was passed by Congress in 1917, the statutory debt limit was designed to give the administration some flexibility, by allowing Congress to approve the issuance of debt in bulk, up to a certain amount. Now, every time the administration inches closer to that amount, Congress has to raise the limit so the government can keep borrowing money to pay for its spending.

That system, according to a report issued by Moody’s analyst Steven Hess, has created “periodic uncertainty” over whether the U.S. can continue to meet its obligations to creditors, Reuters reported Monday. “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Hess wrote.

The proposal, of course, has little chance of becoming law. For one thing, polls have shown that vast majorities of Americans are actually against raising the debt limit at all. That may be a feature of the esoteric nature of these negotiations, and of the failure of Democratic lawmakers to make the case for stimulus measures, but it’s a sign of the general public’s distaste for deficit spending. It’s also unlikely that Congress will simply relinquish its power to approve the issuance of government debt, since, as we’ve seen, it gives lawmakers a powerful tool to extract concessions from the executive.

But it does raise an important point that goes straight to the heart of the current debate: In suggesting that the U.S. scrap its statutory limit on the issuance of debt, Moody’s would seem to be at least tacitly acknowledging that bond markets don’t mind U.S. government spending as much as deficit hawks would have you believe. After all, the interest rate on 10-year Treasury bonds has been dropping steadily in the month of July, closing at 2.94 percent last week and opening roughly at 2.87 on Monday morning — basically the lowest rates in 40 years.

Lawmakers in both parties who are opposed to more aggressive measures to stimulate the economy — especially those affiliated with the Tea Party — have repeatedly cited the vengeance of the bond markets as a reason to slash government spending rather than preserve or increase it, or at least offset it with revenue increases from tax hikes or loophole closures. Rep. Paul Ryan, the Republican chairman of the House Budget Committee, told CNBC earlier this month that the government needs to “get spending under control to show that we’re getting our borrowing under control so we take pressure off the interest rates.”

If deficit spending was really a core issue for bond buyers surveying the market, the agencies that rate those bonds might well prefer some sort of statutory debt limit, even if it encourages political gridlock. Of course, $14 trillion in national debt is not ideal, and ratings agencies such as Moody’s have certainly admonished the U.S. government to get its spending under control. But when the economy is depressed, as it is now, interest rates remain low. And bond buyers, it seems, are at least willing to tolerate continued deficit spending in exchange for the full faith and credit of the United States.

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  • Hamptons Hedge Fund Advisor

    I told my neighbor he should get more credit so that he could afford to cut his lawn, as it was affecting my property value. 

  • James Vincent Hodgson

    I agree get rid of this archaic and useless device it is a classic example of more than needed checks and balances. The reason is that the budget determines whether debt needs to be added to or is reduced ( I.e a budget surpus.. wow).
    In a recession two thing always happen a) tax income goes down, b)social and welfare (eg unemployment benefits) and Medical costs increase QED defict / debt rises and bonds have to be issued.
    A re-introduction of pay go in Budgets is needed going forward and congressional approval for war spending and new departments or agencies commissions or committees within departments  ( unbudgeted portions) and stimulus spending in recessions bond issuance + debt increase to cover. Once that has settled in the debt ceiling is automatically set at say 65/ 70 % of GDP ( this covers inflation and changes in purchasing power of the $$ )except when it is increased via the above votes. 

  • steve banicki

    What we need is adults in Washington.

    This is for you Red and Laura!! Happy Birthday.”China has called on Washington to bolster international faith in its economic policies amid signs that Beijing has cut its purchases of US government debt.” Financial Times (Asia-Pacific), July 20, 2011Is Congress hurting or helping our reputation with the rest of the world? Their recent actions relating to gaining control of our finances is doing harm. The world respects the checks and balances between the different branches of our federal government; however, it does not appreciate our government using funds that are rightfully owed to them as a weapon in our internal battles. Read More