The Debt Ceiling and Government Default

by Fred Siegmund

Congress has passed debt ceiling legislation for many years pandering to voters who worry debt is a sin, or a symbol of excess, or will bring an economic collapse. As the economy grows, debt grows, creating a repeated cycle of debt ceiling votes.

Taking a vote gives a minority of politicians an opportunity to make politically correct statements about the excesses of government and their noble efforts to limit the excess. Then the majority makes the only sensible decision and votes to raise the debt ceiling.

Maybe it’s different now, but we will have to wait a while longer.

I have never heard a politician of either party try to explain the difference between Federal debt and all other types of debt, both public and private, even though at least some know the difference. Current threats to limit the debt and cause a default are not only irresponsible but unnecessary, and nothing more than politics and posturing on both sides.

Federal debt is unique among debt because the Federal government determines the money supply, always a human decision. In the United States, money is nothing but a number held on double entry accounts. Coins and currency are assets to the non-banking public but a liability to the treasury and the Federal Reserve Bank.

Personal and business bank accounts are assets to the banking public but liabilities to banks. Therefore, money is a non-interest bearing liability. while federal debt is debt that pays interest. In effect, money is non-interest bearing debt.

At any time and in any amount, the U.S. Treasury and the Federal Reserve Bank can arrange to convert interest bearing debt to non-interest bearing debt, and allow payment of the government’s bills without default. They could pay off the entire federal debt in a day or two, but they will not because it will increase inflation and their aim is to manage the economy in the best interests of everyone.

Boehner’s statement that “this is not a game” is false. All previous presidents and Congress have always played the debt ceiling game by the rules, which allowed everyone to max out on politics and then raise the ceiling. No one has questioned the authority of Congress to interfere with the constitutional requirement for the President to pay the bills and manage the government’s finances.

The people who take the debt ceiling limit seriously want us to believe the Congress can pass legislation that prevents the President from doing duties spelled out in the constitution.

The President has whatever authority he needs to avoid default even if Congress decides to be irresponsible and votes default. The debt ceiling battle appears unique in American politics: both sides have to refuse to do what they are able to do to cause default.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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