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  • Clarifications about the debt ceiling [Edit or Delete]0 comments
    Jul 14, 2011 10:02 AM
    Here's why stock and bonds markets are ignoring the debt ceiling issue and why the debt ceiling doesn't pose a credible economic threat:

     A 'debt ceiling' doesn't mean less government spending. New budgets are issued on a yearly basis via the Budget Act of 1974. The end result is more spending every time the budget is renewed. One possible outcome is there is no agreemennt and the debt ceiling remains fixed, but the bond holders are still paid via a 1935 supreme court ruling on the Fourteenth Amendment in Perry v United States. Supreme Court has previously ruled that voiding a U.S. government debt is beyond the power of Congress, which could help explain why yields have remained historically low throughout the entire ordeal. Democrats, republicans and the stock market can rest assured knowing that when the yeary budget comes around there will be continued spending for tax cuts, homeland security, defense and entitlement programs like social security and medicare.
    from wikipedia:
    The federal government's expenditures in FY2010 included Medicare & Medicaid ($793B or 23%), Social Security ($701B or 20%), Defense Department ($689B or 20%), non-defense discretionary ($660B or 19%), other ($416B or 12%) and interest ($197B or 6%). Expenditures are classified as mandatory, with payments required by specific laws, or discretionary, with payment amounts renewed annually as part of the budget process
    A debt ceiling may simply slow the rate of spending, but not absolute spending. The budget is still expected to be in the trillions as you can see above.

    The USA takes in over $2 trillion in year tax revenue yet interest in the debt accounts for less than $200 billion, so even if the debt ceiling isn't raised paying the bond holders shouldn't be an issue. China's booming eonomy and trade surplus is helping to keep interest rates low, which is why any form protectionism would be bad for the economy not only in terms of slowing growth but creating inflation.
    The liberals and libertarians want to see a day of reckoning-for all debt to be retired or cancelled and the economy to grind to a halt. It ain't gonna happen.
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