United States debt-ceiling crisis
Encyclopedia
The United States debt-ceiling crisis was a financial crisis
in 2011 that started as a debate in the United States Congress
about increasing the debt ceiling
. The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending. However, similar debates are anticipated for the 2012 and 2013 budget.
President
Barack Obama
and Speaker of the House John Boehner
announced on July 31 that an agreement had been achieved. After the legislation was passed by both the House
and Senate
, President Obama signed the Budget Control Act of 2011
into law on August 2, the date estimated by the Department of the Treasury that the borrowing authority of the US would be exhausted.
Four days later, on August 5, the credit-rating agency Standard & Poor's downgraded the credit rating of US government bond for the first time in the country's history. Markets around the world as well as the three major indexes in the US then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6%) in one day. Yields on US Treasuries, however, dropped as investors, anxious over the dismal prospects of the US economic recovery and the ongoing Eurozone debt crisis, fled into the safety of US government bonds. Moody's
and Fitch, however, have retained America's credit rating at AAA.
. Congress has set a debt ceiling, beyond which Treasury cannot borrow. In the absence of sufficient revenue, a failure to raise the debt ceiling would result in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. At that point, the government must cancel or delay some spending, a situation sometimes referred as a partial government shut down.
In addition, the Obama administration stated that, without this increase, the US would enter sovereign default
(failure to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets. Alternatively, default could be averted if the government were to promptly reduce its other spending by about half.
An increase in the debt ceiling requires the approval of both houses of Congress. Republicans and some Democrats insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt. There were differences as to how to reduce the expected increase in the debt. Initially, nearly all Republican legislators (who held a majority in the House of Representatives) opposed any increase in taxes and proposed large spending cuts. A large majority of Democratic legislators (who held a majority in the Senate) favored tax increases along with smaller spending cuts. Supporters of the Tea Party movement
pushed their fellow Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a constitutional amendment
requiring a balanced budget
.
, the federal government can pay for expenditures only if Congress has approved the expenditure. If the total expenditure exceeds the revenues collected there is a budget deficit, and the only way that the shortfall can be paid for is for the government, through the Department of the Treasury
, to borrow the shortfall amount by the issue of debt instruments. Under federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a vote by Congress.
Prior to 1917, Congress directly authorized the amount of each borrowing. In 1917, in order to provide more flexibility to finance the US involvement in World War I
, Congress instituted the concept of a "debt ceiling". Since then, the Treasury may borrow any amount needed as long as it keeps the total at or below the authorized ceiling. Some small special classes of debt are not included in this total. To change the debt ceiling, Congress must enact specific legislation, and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling does not have any direct impact on the budget deficit. The US government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office
explains: "The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred." The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.
The US has had public debt since its inception. Debts incurred during the American Revolutionary War
and under the Articles of Confederation
led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every president since Harry Truman has added to the national debt. The debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Reagan
, eight times under Bill Clinton
, seven times under George W. Bush
and three times under Barack Obama
.
, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling allows the federal government to continue to borrow money to support current spending levels. If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. If the interest payments on the national debt are not made, the US would be in default
, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)
According to the Treasury, "failing to increase the debt limit would . . . cause the government to default on its legal obligations – an unprecedented event in American history". These legal obligations include paying Social Security
and Medicare
benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt.
Critics have argued that the debt ceiling crisis is "self-inflicted," as treasury bond interest rates were at historical lows, and the US had no market restrictions on its ability to obtain additional credit. The debt ceiling has been raised 68 times since 1960. Sometimes the increase was treated as routine, many times it was used to score political points for the minority party by criticizing the out-of-control spending of the majority. The only other country with a debt limit is Denmark
, which has set its debt ceiling so high that it is unlikely to be reached. If raising the limit ceases to be routine, this may create uncertainty for global markets each time a debt ceiling increase is debated. This crisis has shown how a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit.
(CBO): "At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of fiscal year 2011, the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP) — the highest percentage since shortly after World War II." The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending related to the severe recession and persistently high unemployment in 2008–11
.
In 2009, the Tea Party movement
emerged with a focus on reducing government spending and regulation. The Tea Party movement helped usher in a wave of new Republican office-holders in the 2010 mid-term elections
whose major planks during the campaign included cutting federal spending and stopping any tax increases. These new Republicans and the new Republican House majority greatly affected the 2011 debt ceiling political debate.
In early 2010, President Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015. The commission issued its report in December 2010, but the recommendations were never adopted.
Throughout 2011, Standard & Poor's
and Moody's
credit rating services issued warnings that US debt could be downgraded because of the continued large deficits and increasing debt. According to the CBO's 2011 long-term budget outlook, without major policy changes the large budget deficits and growing debt would continue, which "would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States." The European sovereign debt crisis was occurring throughout 2010–2011, and there were concerns that the US was on the same trajectory.
On April 15, 2011, Congress passed the last part of the 2011 United States federal budget
, authorizing federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion.
However, soon after the 2011 budget was passed, the debt ceiling set in February 2010 was reached. In a letter to Congress of April 4, 2011, Treasury Secretary Timothy Geithner explained that when the debt ceiling is reached, the US Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt, such as the sale of assets from the Civil Service Retirement and Disability Fund
and the G Fund of the Thrift Savings Plan
. These measures were implemented on May 16, 2011, when Geithner declared a "debt issuance suspension period". According to his letter to Congress, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted". These methods have been used on several previous occasions in which federal debt neared its statutory limit.
Some commentators disputed that date as the deadline. According to Barclays Capital
, Treasury would run out of cash around August 10, when $8.5 billion in Social Security payments were due. According to Wall Street
analysts, Treasury would not be able borrow from the capital markets after August 2, but still would have enough incoming cash to meet its obligations until August 15. Analysts also predicted that Treasury would be able to roll over the $90 billion in US debt that matured on August 4, and gain additional time to avert the crisis.
Projections required for debt and cash management can be volatile. Outside experts that track Treasury finances had said that announced Treasury estimates were within the range of uncertainty for their analyses. Delaying an increase in the debt limit past August 2 could have risked a delay in Social Security and other benefit checks, and could have led to disruptions in scheduled Treasury auctions.
, suggested even a brief failure to meet US obligations could have devastating long-term consequences, others argued that the market would write it off as a Congressional dispute and return to normal once the immediate crisis was resolved.
Some argued that the worst outcome would be if the US failed to pay interest and/or principal on the national debt to bondholders, thereby defaulting on its sovereign debt. Former Treasury Secretary Lawrence Summers
warned in July 2011 that the consequences of such a default would be higher borrowing costs for the US government (as much as one percent or $150 billion/year in additional interest costs) and the equivalent of bank run
s on the money market
s and other financial markets, potentially as severe as those of September 2008.
In January 2011 Treasury Secretary Timothy Geithner warned that "failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."
Senators Pat Toomey
and Jim DeMint
expressed deep concern that administration officials were stating or implying that failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis: "We believe it is irresponsible and harmful for you to sow the seeds of doubt in the market regarding the full faith and credit of the United States and ask that you set the record straight — that you will use all available Treasury funds necessary to prevent default while Congress addresses the looming debt crisis."
Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argued that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matured, which it would be unable to do under any conceivable circumstance. He concluded: "There is no alternative to enactment of a timely increase in the debt limit." On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163] that would require the Treasury to prioritize payments to service the national debt over other obligations. (The bill was cleared by its committee for consideration the next day and added to the Senate "calendar of business", but no further action had occurred by mid-August 2011.)
Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as ten percent of GDP overnight, leading to a corresponding fall in aggregate demand
. Keynesian economists believe that such a significant shock, if sustained, would reverse the economic recovery and send the country into a recession.
The Republican position on raising the debt ceiling:
(One representative, Ron Paul
, proposed transferring $1.6 trillion of Federal Reserve
assets to the government and destroying those bonds, thereby reducing the United States gross federal debt by the same amount This would violate the property rights of national banks who own the Federal Reserve Bank
s.)
The Democratic position on raising the debt ceiling:
(Some Democratic lawmakers suggested that the President could declare that the debt ceiling violates the US Constitution and issue an Executive Order
to direct the Treasury to issue more debt)
The US House of Representatives originally refused to raise the debt ceiling without deficit reduction, voting down a "clean" bill to increase the debt ceiling without conditions. The May 31 vote was 318 to 97, with all 236 Republicans and 82 Democrats voting to defeat the bill. The Republicans largely believed a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long-term issue of debt. Obama and the Democrats in the US Congress wanted an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange supported a decrease in the budget deficit, to be funded by a combination of spending cuts and revenue increases. Some prominent liberal economists, such as Paul Krugman
, Larry Summers, and Brad DeLong
, and prominent investors such as Bill Gross
, went even further, and argued that not only should the debt ceiling be raised, but federal spending (and, therefore, the deficit) should be increased in the short term (as long as the economy remains in the liquidity trap
), which they believed would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in the medium to long term.
Some Tea Party Caucus
and other Republicans, however, (including, but not limited to, Senators Jim DeMint
, Rand Paul
, and Mike Lee, and Representatives Michele Bachmann
, Ron Paul, and Allen West) expressed skepticism about raising the debt ceiling (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised, and "instead the federal debt [should] be 'capped' at the current limit," "although that would oblige the government to cut spending by almost half overnight."
Jack Balkin
, the Knight Professor of Constitutional Law and the First Amendment
at Yale Law School
, suggested two other ways to solve the debt ceiling crisis: he pointed out that the US Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by simply issuing two platinum coins in denominations of $1 trillion each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggested, would be for the federal government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Federal Reserve would then credit the proceeds to the government's checking account. Once Congress lifted the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.
In a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling "creates a high level of uncertainty" and an increased risk of default. As reported by The Washington Post
, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government's ability to meet its debt obligations." Other public figures, including Democratic ex-President Bill Clinton
and Republican ex-CBO director Douglas Holtz-Eakin, have suggested eliminating the debt ceiling.
Arguments
as a solution, although there had been speculation about the option online since January 2011. Hence, it was suggested that (for instance) a US$5 trillion coin could be minted and deposited with the Federal Reserve and used to buy back debt, thus making funds available.
deposits at the Federal Reserve, which it could do because the market price of gold had increased. According to experts, the Secretary of the Treasury is still authorized to monetize
8,000 tons of gold, valued under the old law at approximately $42 per ounce, but with a market value worth over $1,600 per ounce.
Most of the $900 billion in cuts occur in future years, and so will not remove significant capital from the economy in the current and following year. The across-the-board cuts could not take place until 2013. If they are triggered, a new Congress could vote to eliminate or deepen all or part of them. Boehner was reported to be particularly concerned that any defense cuts could not go into effect until after 2013. The President may make the specified increases, but to stop them, the Congress must pass a bill to disapprove of them by the two-thirds majority needed to override a veto.
The agreement, entitled the Budget Control Act of 2011
, passed the House on August 1, 2011, by a vote of 269–161; 174 Republicans and 95 Democrats voted for it, while 66 Republicans and 95 Democrats voted against it. The Senate passed the agreement on August 2, 2011, by a vote of 74–26; seven Democrats and 19 Republicans voted against it. Obama signed the bill shortly after it was passed by the Senate.
. According to the International Monetary Fund
, the US joined a group of countries whose public debt exceeds their GDP. The group includes Japan (229 percent), Greece
(152 percent), Jamaica
(137 percent), Lebanon
(134 percent), Italy
(120 percent), Ireland (114 percent), and Iceland
(103 percent).
The NASDAQ
, ASX
, and S&P 100
lost up to four percent in value, the largest drop since July 2009, during the global financial crisis
that was precipitated in part by the United States housing bubble
and the corresponding losses by holders of mortgages and mortgage-backed securities
. The commodities market also took losses, with average spot crude oil prices falling below $US86 a barrel. The price of gold fell, as deepening losses on Wall Street prompted investors to sell.
On August 5, 2011, Standard & Poor's credit rating agency downgraded the long-term credit rating of the United States government for the first time in its history, from AAA to AA+: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics". A week later, S&P senior director Joydeep Mukherji said that one factor was that numerous American politicians expressed skepticism about the serious consequences of a default—an attitude that he said was "not common" among countries with a AAA rating. The other two major credit rating agencies, Moody's
and Fitch, continued to rate the federal government's bonds as AAA.
In a joint press release on the same day from the Federal Reserve System
, the Federal Deposit Insurance Corporation
, the National Credit Union Administration
, and the Office of the Comptroller of the Currency
, federally regulated institutions were told that for risk-based
capital purposes, the debt of the United States was still considered to be risk free
.
characterized the political brinkmanship
in Washington as playing a game of chicken
, and criticized the US government for "dangerously irresponsible" actions.
International reaction to the US credit rating downgrade has been mixed. Australian Prime Minister Julia Gillard
urged calm over the downgrade, since only one of the three major credit rating agencies decided to lower its rating. On August 6, 2011, China, the largest foreign holder of United States debt, said that Washington needed to "cure its addiction to debts" and "live within its means". The official Xinhua News Agency
was critical of the US government, questioned whether the US dollar should continue to be the global reserve currency, and called for international supervision over the issue of US dollar.
The downgrade started a sell-off in every major stock market index
around the world, threatening a stock market crash
in the international markets. The G7 finance minister
s scheduled a meeting to discuss the "global financial crisis that concerns all countries."
, which was seeing its support somewhat wane prior to the crisis to lose support among many Americans as many House Republican supporters of the movement opposed raising the debt ceiling under any circumstances. In a poll taken shortly after the deal was signed by the President, 40 percent of Americans held an unfavorable view of the movement, with only 20 percent supporting it. Republicans were viewed as holding most of the responsibility for the dispute. In a September 27 poll taken by CNN
and the ORC International
, 53 percent of Americans polled held a negative view of the Tea Party, with just 28 percent supporting it.
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
in 2011 that started as a debate in the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
about increasing the debt ceiling
United States public debt
The United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies...
. The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending. However, similar debates are anticipated for the 2012 and 2013 budget.
President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
and Speaker of the House John Boehner
John Boehner
John Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...
announced on July 31 that an agreement had been achieved. After the legislation was passed by both the House
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
and Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
, President Obama signed the Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...
into law on August 2, the date estimated by the Department of the Treasury that the borrowing authority of the US would be exhausted.
Four days later, on August 5, the credit-rating agency Standard & Poor's downgraded the credit rating of US government bond for the first time in the country's history. Markets around the world as well as the three major indexes in the US then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6%) in one day. Yields on US Treasuries, however, dropped as investors, anxious over the dismal prospects of the US economic recovery and the ongoing Eurozone debt crisis, fled into the safety of US government bonds. Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
and Fitch, however, have retained America's credit rating at AAA.
Context
Under US law, an administration can spend only if it has sufficient funds to pay for it. These funds can come either from tax receipts or from borrowing by the United States Department of the TreasuryUnited States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
. Congress has set a debt ceiling, beyond which Treasury cannot borrow. In the absence of sufficient revenue, a failure to raise the debt ceiling would result in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. At that point, the government must cancel or delay some spending, a situation sometimes referred as a partial government shut down.
In addition, the Obama administration stated that, without this increase, the US would enter sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...
(failure to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets. Alternatively, default could be averted if the government were to promptly reduce its other spending by about half.
An increase in the debt ceiling requires the approval of both houses of Congress. Republicans and some Democrats insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt. There were differences as to how to reduce the expected increase in the debt. Initially, nearly all Republican legislators (who held a majority in the House of Representatives) opposed any increase in taxes and proposed large spending cuts. A large majority of Democratic legislators (who held a majority in the Senate) favored tax increases along with smaller spending cuts. Supporters of the Tea Party movement
Tea Party movement
The Tea Party movement is an American populist political movement that is generally recognized as conservative and libertarian, and has sponsored protests and supported political candidates since 2009...
pushed their fellow Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a constitutional amendment
Constitutional amendment
A constitutional amendment is a formal change to the text of the written constitution of a nation or state.Most constitutions require that amendments cannot be enacted unless they have passed a special procedure that is more stringent than that required of ordinary legislation...
requiring a balanced budget
Balanced budget
A balanced budget is when there is neither a budget deficit or a budget surplus – when revenues equal expenditure – particularly by a government. More generally, it refers to when there is no deficit, but possibly a surplus...
.
Background
What is the debt ceiling?
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the federal government can pay for expenditures only if Congress has approved the expenditure. If the total expenditure exceeds the revenues collected there is a budget deficit, and the only way that the shortfall can be paid for is for the government, through the Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, to borrow the shortfall amount by the issue of debt instruments. Under federal law, the amount that the government can borrow is limited by the debt ceiling, which can only be increased with a vote by Congress.
Prior to 1917, Congress directly authorized the amount of each borrowing. In 1917, in order to provide more flexibility to finance the US involvement in World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, Congress instituted the concept of a "debt ceiling". Since then, the Treasury may borrow any amount needed as long as it keeps the total at or below the authorized ceiling. Some small special classes of debt are not included in this total. To change the debt ceiling, Congress must enact specific legislation, and the President must sign it into law.
The process of setting the debt ceiling is separate and distinct from the regular process of financing government operations, and raising the debt ceiling does not have any direct impact on the budget deficit. The US government passes a federal budget every year. This budget details projected tax collections and outlays and, therefore, the amount of borrowing the government would have to do in that fiscal year. A vote to increase the debt ceiling is, therefore, usually seen as a formality, needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...
explains: "The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred." The apparent redundancy of the debt ceiling has led to suggestions that it should be abolished altogether.
The US has had public debt since its inception. Debts incurred during the American Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...
and under the Articles of Confederation
Articles of Confederation
The Articles of Confederation, formally the Articles of Confederation and Perpetual Union, was an agreement among the 13 founding states that legally established the United States of America as a confederation of sovereign states and served as its first constitution...
led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791). Every president since Harry Truman has added to the national debt. The debt ceiling has been raised 74 times since March 1962, including 18 times under Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
, eight times under Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
, seven times under George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
and three times under Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
.
, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling allows the federal government to continue to borrow money to support current spending levels. If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. If the interest payments on the national debt are not made, the US would be in default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)
According to the Treasury, "failing to increase the debt limit would . . . cause the government to default on its legal obligations – an unprecedented event in American history". These legal obligations include paying Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
and Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt.
Critics have argued that the debt ceiling crisis is "self-inflicted," as treasury bond interest rates were at historical lows, and the US had no market restrictions on its ability to obtain additional credit. The debt ceiling has been raised 68 times since 1960. Sometimes the increase was treated as routine, many times it was used to score political points for the minority party by criticizing the out-of-control spending of the majority. The only other country with a debt limit is Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
, which has set its debt ceiling so high that it is unlikely to be reached. If raising the limit ceases to be routine, this may create uncertainty for global markets each time a debt ceiling increase is debated. This crisis has shown how a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit.
Recent concern about budget deficits and long-term debt
Underlying the contentious debate over raising the debt ceiling has been an anxiety, growing since 2008, about the large United States federal budget deficits and the increasing federal debt. According to the Congressional Budget OfficeCongressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
(CBO): "At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (a little above the 40-year average of 37 percent). Since then, the figure has shot upward: By the end of fiscal year 2011, the Congressional Budget Office (CBO) projects federal debt will reach roughly 70 percent of gross domestic product (GDP) — the highest percentage since shortly after World War II." The sharp rise in debt after 2008 stems largely from lower tax revenues and higher federal spending related to the severe recession and persistently high unemployment in 2008–11
Late 2000s recession
The late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...
.
In 2009, the Tea Party movement
Tea Party movement
The Tea Party movement is an American populist political movement that is generally recognized as conservative and libertarian, and has sponsored protests and supported political candidates since 2009...
emerged with a focus on reducing government spending and regulation. The Tea Party movement helped usher in a wave of new Republican office-holders in the 2010 mid-term elections
United States elections, 2010
The 2010 United States elections were held on Tuesday, November 2, 2010. During this midterm election year, all 435 seats in the United States House of Representatives and 37 of the 100 seats in the United States Senate were contested in this election along with 38 state and territorial...
whose major planks during the campaign included cutting federal spending and stopping any tax increases. These new Republicans and the new Republican House majority greatly affected the 2011 debt ceiling political debate.
In early 2010, President Obama established the Bowles-Simpson Commission to propose recommendations to balance the budget by 2015. The commission issued its report in December 2010, but the recommendations were never adopted.
Throughout 2011, Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
and Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
credit rating services issued warnings that US debt could be downgraded because of the continued large deficits and increasing debt. According to the CBO's 2011 long-term budget outlook, without major policy changes the large budget deficits and growing debt would continue, which "would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States." The European sovereign debt crisis was occurring throughout 2010–2011, and there were concerns that the US was on the same trajectory.
Resort to extraordinary measures
Prior to the debt ceiling crisis of 2011, the debt ceiling was last raised on February 12, 2010 to $14.294 trillion.On April 15, 2011, Congress passed the last part of the 2011 United States federal budget
2011 United States federal budget
The 2011 United States federal budget is the United States federal budget to fund government operations for the fiscal year 2011, which is October 2010–September 2011. The budget is the subject of a spending request by President Barack Obama...
, authorizing federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion.
However, soon after the 2011 budget was passed, the debt ceiling set in February 2010 was reached. In a letter to Congress of April 4, 2011, Treasury Secretary Timothy Geithner explained that when the debt ceiling is reached, the US Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet federal obligations but which do not require the issue of new debt, such as the sale of assets from the Civil Service Retirement and Disability Fund
Civil Service Retirement System
The Civil Service Retirement System organized in 1920 and has provided retirement, disability and survivor benefits for most civilian employees in the US federal government. Upon the creation of a new Federal Employees Retirement System in 1987, those newly hired after that date cannot...
and the G Fund of the Thrift Savings Plan
Thrift Savings Plan
The Thrift Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services....
. These measures were implemented on May 16, 2011, when Geithner declared a "debt issuance suspension period". According to his letter to Congress, this period could "last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted". These methods have been used on several previous occasions in which federal debt neared its statutory limit.
Alternate views of the deadline
According to Treasury, the US government would run out of cash to pay all its bills on August 2, 2011, which became the deadline for Congress to vote to increase the debt ceiling.Some commentators disputed that date as the deadline. According to Barclays Capital
Barclays Capital
Barclays Capital is a global British investment bank. It is the investment banking division of Barclays plc which has a balance sheet of over £1.2 trillion . Barclays Capital provides financing and risk management services to large companies, institutions and government clients. It is a primary...
, Treasury would run out of cash around August 10, when $8.5 billion in Social Security payments were due. According to Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
analysts, Treasury would not be able borrow from the capital markets after August 2, but still would have enough incoming cash to meet its obligations until August 15. Analysts also predicted that Treasury would be able to roll over the $90 billion in US debt that matured on August 4, and gain additional time to avert the crisis.
Projections required for debt and cash management can be volatile. Outside experts that track Treasury finances had said that announced Treasury estimates were within the range of uncertainty for their analyses. Delaying an increase in the debt limit past August 2 could have risked a delay in Social Security and other benefit checks, and could have led to disruptions in scheduled Treasury auctions.
Implications of not raising the debt ceiling
Experts were divided on how bad the effects of not raising the debt ceiling for a short period would be on the economy. While some leading economists, including Republican adviser Douglas Holtz-EakinDouglas Holtz-Eakin
Douglas J. "Doug" Holtz-Eakin is an American economist, former professor, former Director of the Congressional Budget Office and former chief economic policy adviser to U.S...
, suggested even a brief failure to meet US obligations could have devastating long-term consequences, others argued that the market would write it off as a Congressional dispute and return to normal once the immediate crisis was resolved.
Some argued that the worst outcome would be if the US failed to pay interest and/or principal on the national debt to bondholders, thereby defaulting on its sovereign debt. Former Treasury Secretary Lawrence Summers
Lawrence Summers
Lawrence Henry Summers is an American economist. He served as the 71st United States Secretary of the Treasury from 1999 to 2001 under President Bill Clinton. He was Director of the White House United States National Economic Council for President Barack Obama until November 2010.Summers is the...
warned in July 2011 that the consequences of such a default would be higher borrowing costs for the US government (as much as one percent or $150 billion/year in additional interest costs) and the equivalent of bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s on the money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
s and other financial markets, potentially as severe as those of September 2008.
In January 2011 Treasury Secretary Timothy Geithner warned that "failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs. Even a very short-term or limited default would have catastrophic economic consequences that would last for decades."
Senators Pat Toomey
Pat Toomey
Patrick Joseph "Pat" Toomey, Sr. is the junior United States Senator for Pennsylvania and a member of the Republican Party. Previously, Toomey served as a U.S. Representative for three terms, but did not seek a fourth in compliance with a pledge he had made while running for office in 1998...
and Jim DeMint
Jim DeMint
James Warren "Jim" DeMint is the junior U.S. Senator from South Carolina, serving since 2005. He is a member of the Republican Party and a leader in the Tea Party movement. He previously served as the U.S. Representative for from 1999 to 2005.-Early life and education:DeMint was born in...
expressed deep concern that administration officials were stating or implying that failure to raise the nation's debt limit would constitute a default on US debt and precipitate a financial crisis: "We believe it is irresponsible and harmful for you to sow the seeds of doubt in the market regarding the full faith and credit of the United States and ask that you set the record straight — that you will use all available Treasury funds necessary to prevent default while Congress addresses the looming debt crisis."
Geithner responded that prioritizing debt would require "cutting roughly 40 percent of all government payments", which could only be achieved by "selectively defaulting on obligations previously approved by Congress". He argued that this would harm the reputation of the United States so severely that there is "no guarantee that investors would continue to re-invest in new Treasury securities", forcing the government to repay the principal on existing debt as it matured, which it would be unable to do under any conceivable circumstance. He concluded: "There is no alternative to enactment of a timely increase in the debt limit." On January 25, 2011, Senator Toomey introduced The Full Faith And Credit Act bill [S.163] that would require the Treasury to prioritize payments to service the national debt over other obligations. (The bill was cleared by its committee for consideration the next day and added to the Senate "calendar of business", but no further action had occurred by mid-August 2011.)
Even if the Treasury were to prioritize payments on the debt above other spending and avoid formal default on its bonds, failure to raise the debt ceiling would force the government to reduce its spending by as much as ten percent of GDP overnight, leading to a corresponding fall in aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
. Keynesian economists believe that such a significant shock, if sustained, would reverse the economic recovery and send the country into a recession.
Proposed resolutions
Congress considered whether and by how much to extend the debt ceiling (or eliminate it), and what long-term policy changes (if any) should be made concurrently.The Republican position on raising the debt ceiling:
- Dollar-for-dollar deal – raise the debt ceiling to match corresponding spending cuts
- More of the budget cuts in the first two years
- Spending caps
- Balanced Budget AmendmentBalanced Budget AmendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
– to pass Congress and be sent to states for ratification - No tax increases – tax reform could be considered
(One representative, Ron Paul
Ron Paul
Ronald Ernest "Ron" Paul is an American physician, author and United States Congressman who is seeking to be the Republican Party candidate in the 2012 presidential election. Paul represents Texas's 14th congressional district, which covers an area south and southwest of Houston that includes...
, proposed transferring $1.6 trillion of Federal Reserve
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
assets to the government and destroying those bonds, thereby reducing the United States gross federal debt by the same amount This would violate the property rights of national banks who own the Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
s.)
The Democratic position on raising the debt ceiling:
- Initially wanted a "clean" increase or unconditional raise to the debt ceiling with no spending cuts attached,
- Spending cuts combined with tax increases on some categories of taxpayers, to reduce deficits. (1:1 spending cut / tax increase ratio initially desired in the Congress, 3:1 offered by President Obama)
- Large debt limit increase to support borrowing into 2013 (after the next election)
- Opposed to any major cuts to Social SecuritySocial Security (United States)In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
, MedicareMedicare (United States)Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
, or MedicaidMedicaidMedicaid is the United States health program for certain people and families with low incomes and resources. It is a means-tested program that is jointly funded by the state and federal governments, and is managed by the states. People served by Medicaid are U.S. citizens or legal permanent...
(Some Democratic lawmakers suggested that the President could declare that the debt ceiling violates the US Constitution and issue an Executive Order
Executive order
An executive order in the United States is an order issued by the President, the head of the executive branch of the federal government. In other countries, similar edicts may be known as decrees, or orders in council. Executive orders may also be issued at the state level by a state's governor or...
to direct the Treasury to issue more debt)
The US House of Representatives originally refused to raise the debt ceiling without deficit reduction, voting down a "clean" bill to increase the debt ceiling without conditions. The May 31 vote was 318 to 97, with all 236 Republicans and 82 Democrats voting to defeat the bill. The Republicans largely believed a deficit reduction deal should be based solely on spending cuts, including cuts to entitlements, without any tax increases, to reduce or solve the long-term issue of debt. Obama and the Democrats in the US Congress wanted an increase in the debt ceiling to solve the short-term borrowing problem, and in exchange supported a decrease in the budget deficit, to be funded by a combination of spending cuts and revenue increases. Some prominent liberal economists, such as Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
, Larry Summers, and Brad DeLong
J. Bradford DeLong
James Bradford DeLong commonly known as Brad DeLong, is a professor of Economics and chair of the Political Economy major at the University of California, Berkeley. He served as Deputy Assistant Secretary of the United States Department of the Treasury in the Clinton Administration under Lawrence...
, and prominent investors such as Bill Gross
Bill Gross
Bill Gross is an American businessman. Born in 1958, he grew up in Encino, California. He founded GNP Loudspeakers , an audio equipment manufacturer; GNP Development Inc., acquired by Lotus Software; and Knowledge Adventure, an educational software company, later acquired by Cendant...
, went even further, and argued that not only should the debt ceiling be raised, but federal spending (and, therefore, the deficit) should be increased in the short term (as long as the economy remains in the liquidity trap
Liquidity trap
A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as...
), which they believed would stimulate the economy, reduce unemployment, and ultimately reduce the deficit in the medium to long term.
Some Tea Party Caucus
Tea Party Caucus
The Tea Party Caucus is a caucus of the United States House of Representatives and Senate launched and chaired by Minnesota Congresswoman Michele Bachmann on July 16, 2010. The caucus is dedicated to promoting what it considers fiscal responsibility, adherence to the movement's interpretation of...
and other Republicans, however, (including, but not limited to, Senators Jim DeMint
Jim DeMint
James Warren "Jim" DeMint is the junior U.S. Senator from South Carolina, serving since 2005. He is a member of the Republican Party and a leader in the Tea Party movement. He previously served as the U.S. Representative for from 1999 to 2005.-Early life and education:DeMint was born in...
, Rand Paul
Rand Paul
Randal Howard "Rand" Paul is the junior United States Senator for Kentucky. He is a member of the Republican Party. A member of the Tea Party movement, he describes himself as a "constitutional conservative" and a libertarian...
, and Mike Lee, and Representatives Michele Bachmann
Michele Bachmann
Michele Marie Bachmann is a Republican member of the United States House of Representatives, representing , a post she has held since 2007. The district includes several of the northern suburbs of the Twin Cities, such as Woodbury, and Blaine as well as Stillwater and St. Cloud.She is currently a...
, Ron Paul, and Allen West) expressed skepticism about raising the debt ceiling (with some suggesting the consequences of default are exaggerated), arguing that the debt ceiling should not be raised, and "instead the federal debt [should] be 'capped' at the current limit," "although that would oblige the government to cut spending by almost half overnight."
Jack Balkin
Jack Balkin
Jack M. Balkin is an American legal scholar. He is the Knight Professor of Constitutional Law and the First Amendment at Yale Law School...
, the Knight Professor of Constitutional Law and the First Amendment
First Amendment to the United States Constitution
The First Amendment to the United States Constitution is part of the Bill of Rights. The amendment prohibits the making of any law respecting an establishment of religion, impeding the free exercise of religion, abridging the freedom of speech, infringing on the freedom of the press, interfering...
at Yale Law School
Yale Law School
Yale Law School, or YLS, is the law school of Yale University in New Haven, Connecticut, United States. Established in 1824, it offers the J.D., LL.M., J.S.D. and M.S.L. degrees in law. It also hosts visiting scholars, visiting researchers and a number of legal research centers...
, suggested two other ways to solve the debt ceiling crisis: he pointed out that the US Treasury has the power to issue platinum coins in any denomination, so it could solve the debt ceiling crisis by simply issuing two platinum coins in denominations of $1 trillion each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds. Another way to solve the debt ceiling crisis, Balkin suggested, would be for the federal government to sell the Federal Reserve an option to purchase government property for $2 trillion. The Federal Reserve would then credit the proceeds to the government's checking account. Once Congress lifted the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days.
In a report issued by the credit rating agency Moody's, analyst Steven Hess suggested that the government should consider getting rid of the limit altogether, because the difficulty inherent in reaching an agreement to raise the debt ceiling "creates a high level of uncertainty" and an increased risk of default. As reported by The Washington Post
The Washington Post
The Washington Post is Washington, D.C.'s largest newspaper and its oldest still-existing paper, founded in 1877. Located in the capital of the United States, The Post has a particular emphasis on national politics. D.C., Maryland, and Virginia editions are printed for daily circulation...
, "without a limit dependent on congressional approval, the report said, the agency would worry less about the government's ability to meet its debt obligations." Other public figures, including Democratic ex-President Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
and Republican ex-CBO director Douglas Holtz-Eakin, have suggested eliminating the debt ceiling.
Fourteenth Amendment
During the debate, some scholars, Democratic lawmakers, and Treasury Secretary Tim Geithner suggested that the President could declare that the debt ceiling violates the Constitution and issue an Executive Order to direct the Treasury to issue more debt. They point to Section 4 of the Fourteenth Amendment to the US Constitution, passed in the context of the Civil War Reconstruction, that states that the validity of the public debt shall not be questioned. Others rebutted this argument by pointing to Section 8 of Article 1 and Section 5 of the Fourteenth Amendment, which state that Congress has the power of the purse and the authority to enforce the Fourteenth Amendment.- Article I, Section 8. The Congress shall have power . . .To borrow Money on the credit of the United States;
- Amendment XIV, Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slaveSlaverySlavery is a system under which people are treated as property to be bought and sold, and are forced to work. Slaves can be held against their will from the time of their capture, purchase or birth, and deprived of the right to leave, to refuse to work, or to demand compensation...
; but all such debts, obligations and claims shall be held illegal and void.
- Amendment XIV, Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.
Arguments
- Jack BalkinJack BalkinJack M. Balkin is an American legal scholar. He is the Knight Professor of Constitutional Law and the First Amendment at Yale Law School...
, looking into the Legislative History of the Fourteenth Amendment, argued that Section 4 was adopted to guard against politically-determined default. Referencing the sponsor of the provision, Senator Benjamin WadeBenjamin WadeBenjamin Franklin "Bluff" Wade was a U.S. lawyer and United States Senator. In the Senate, he was associated with the Radical Republicans of that time.-Early life:...
, Balkin argued that "the central rationale for Section Four ... was to remove threats of default on federal debts from partisan struggle." Balkin quotes Wade: "every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress." According to Balkin, this reveals "an important structural principle. The threat of defaulting on government obligations is a powerful weapon, especially in a complex, interconnected world economy. Devoted partisans can use it to disrupt government, to roil ordinary politics, to undermine policies they do not like, even to seek political revenge. Section Four was placed in the Constitution to remove this weapon from ordinary politics." - Bruce BartlettBruce BartlettBruce Bartlett is an American historian who turned to writing about supply-side economics. He was a domestic policy adviser to President Ronald Reagan and was a Treasury official under President George H.W. Bush....
, a former adviser to President Ronald ReaganRonald ReaganRonald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
and columnist for The Fiscal TimesThe Fiscal TimesThe Fiscal Times is an English-language digital news, news analysis and opinion publication based in New York, NY and Washington, D.C., founded and initially funded in 2010 by Peter G. Peterson, founder of the Peter G. Peterson Foundation...
, argued that Section 4 renders the debt ceiling unconstitutional, and that the President should disregard the debt limit. - The NationThe NationThe Nation is the oldest continuously published weekly magazine in the United States. The periodical, devoted to politics and culture, is self-described as "the flagship of the left." Founded on July 6, 1865, It is published by The Nation Company, L.P., at 33 Irving Place, New York City.The Nation...
editor Katrina vanden HeuvelKatrina vanden HeuvelKatrina vanden Heuvel is the editor, publisher, and part-owner of the magazine The Nation. She has been the magazine's editor since 1995. She is a frequent guest on numerous television programs...
argued that the President could use the public debt section of the Fourteenth Amendment to force the Treasury to continue paying its debts if an agreement to raise the debt ceiling was not reached. - Laurence TribeLaurence TribeLaurence Henry Tribe is a professor of constitutional law at Harvard Law School and the Carl M. Loeb University Professor at Harvard University. He also works with the firm Massey & Gail LLP on a variety of matters....
, professor of Constitutional Law at Harvard Law SchoolHarvard Law SchoolHarvard Law School is one of the professional graduate schools of Harvard University. Located in Cambridge, Massachusetts, it is the oldest continually-operating law school in the United States and is home to the largest academic law library in the world. The school is routinely ranked by the U.S...
, called the argument that the public debt clause can nullify the debt ceiling "false hope" and noted that nothing in the Constitution enabled the President to "usurp legislative power" with regards to the debt. Tribe said that since Congress has means other than borrowing to pay the federal debt (including raising taxes, coining money, and selling federal assets), the argument that the President could seize the power to borrow could be extended to give the President the ability to seize those powers as well. - Garrett EppsGarrett EppsGarrett Epps is an American legal scholar, novelist, and journalist. He is Professor of Law at the University of Baltimore; previously he was the Orlando J. and Marian H. Hollis Professor of Law at the University of Oregon....
counter-argued that the President would not be usurping Congressional power by invoking Section 4 to declare the debt ceiling unconstitutional, because the debt ceiling exceeds Congressional authority. He called it legislative "double-counting," as paraphrased in The New RepublicThe New RepublicThe magazine has also published two articles concerning income inequality, largely criticizing conservative economists for their attempts to deny the existence or negative effect increasing income inequality is having on the United States...
, "because Congress already appropriated the funds in question, it is the executive branch's duty to enact those appropriations." In other words, given Congress has appropriated money via federal programs, the Executive is obligated to enact and, therefore, fund them, but the debt ceiling's limit on debt prevents the executive from carrying out the instructions given by Congress, on the constitutional authority to set appropriations; essentially, to obey the statutory debt ceiling would require usurping congress' constitutional powers, and hence the statute must be unconstitutional. - Former President Bill Clinton endorsed this counter-argument, saying he would eliminate the debt ceiling using the 14th Amendment. He called it "crazy" that Congress first appropriates funds and then gets a second vote on whether to pay.
- Matthew Zeitlin added to the counter-argument that, were Section 4 invoked, members of Congress would not have standing to sue the President for allegedly usurping congressional authority, even if they were willing to do so; and those likely to have standing would be people "designed to elicit zero public sympathy: those who purchased credit default swapCredit default swapA credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
s which would pay off in the event of government default." Matthew Steinglass argued that, because it would come down to the Supreme Court, the Court would not vote in favor of anyone who could and would sue: it would rule the debt ceiling unconstitutional. This is because, for the Court to rule to uphold the debt ceiling, it would, in effect, be voting for the United States to default, with the consequences that would entail; and, Steinglass argues, the Court would not do that. - Michael SternMichael SternMichael Charles Stern is a British Conservative Party politician. Stern contested Derby South at the 1979 general election before being elected as Member of Parliament for Bristol North West at the 1983 general election. He represented the seat for 14 years...
, Senior Counsel to the US House of Representatives from 1996 to 2004, stated that Garrett Epps "had adopted an overly broad interpretation of the Public Debt Clause and that this interpretation, even if accepted, could not justify invalidating the debt limit" because "the President's duty to safeguard the national debt no more enables him to assume Congress's power of the purse than it would enable him to assume the judicial power when (in his opinion) the Supreme Court acts in an unconstitutional manner." - Rob Natelson, former Constitutional Law Professor at University of Montana, argued that "this is not some issue in the disputed boundaries between legislative and executive power." He continued, "That's why the Constitution itself (Article I, Section 8, Clause 2) gives only Congress, not the President, the power "To borrow Money on the credit of the United States." In another argument, Natelson stated that Bruce Bartlett "deftly omits a crucial part of the quote from the Fourteenth Amendment. It actually says, 'The validity of the public debt of the United States, AUTHORIZED BY LAW ... shall not be questioned.' In other words, Congress has to approve the debt for it not to be questioned. And note that this language refers to existing debt, not to creating new debt. He also neglects to mention that Section 5 of the Fourteenth Amendment specifically grants to Congress, not to the President, authority to enforce the amendment."
- Treasury Secretary Tim Geithner implied that the debt ceiling may violate the Constitution; however George MadisonGeorge MadisonGeorge Madison was the sixth Governor of Kentucky. He was the first governor of Kentucky to die in office, serving only a few weeks in 1816. Little is known of Madison's early life. He was a member of the influential Madison family of Virginia, and was a second cousin to President James Madison...
, General Counsel to the US Treasury, wrote that "Secretary Geithner has never argued that the 14th Amendment to the US Constitution allows the President to disregard the statutory debt limit" (but nor did Madison say that Geithner had argued against the proposition either), and that "the Constitution explicitly places the borrowing authority with Congress." He stated that "Secretary Geithner has always viewed the debt limit as a binding legal constraint that can only be raised by Congress."
Minting coins in extremely high denominations
US law does not place a limit on the denomination of minted coins, and specifically mentions that the Mint can create platinum coins of arbitrary value under the discretion of the Secretary of the Treasury. Yale law professor Jack Balkin mentioned seigniorageSeigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...
as a solution, although there had been speculation about the option online since January 2011. Hence, it was suggested that (for instance) a US$5 trillion coin could be minted and deposited with the Federal Reserve and used to buy back debt, thus making funds available.
Monetizing gold
A similar crisis was faced during the Eisenhower Administration in 1953. The debt ceiling was not raised until the spring of 1954. To accommodate the gap, the Eisenhower administration increased its gold certificateGold certificate
A gold certificate in general is a certificate of ownership that gold owners hold instead of storing the actual gold. It has both a historic meaning as a US paper currency and a current meaning as a way to invest in gold....
deposits at the Federal Reserve, which it could do because the market price of gold had increased. According to experts, the Secretary of the Treasury is still authorized to monetize
Monetization
Monetization is the process of converting or establishing something into legal tender. It usually refers to the coining of currency or the printing of banknotes by central banks...
8,000 tons of gold, valued under the old law at approximately $42 per ounce, but with a market value worth over $1,600 per ounce.
Agreement
On July 31, 2011, President Obama announced that the leaders of both parties in both chambers had reached an agreement that would reduce the deficit and avoid default. The same day, Speaker Boehner's office outlined the agreement for House Republicans. According to the statement:- The agreement cut spending more than it increased the debt limit. In the first installment ("tranche"), $917 billion would be cut over 10 years in exchange for increasing the debt limit by $900 billion.
- The agreement established a Congressional Joint Select CommitteeUnited States Congress Joint Select Committee on Deficit ReductionThe Joint Select Committee on Deficit Reduction, colloquially referred to as the Supercommittee, is a joint select committee of the United States Congress, created by the Budget Control Act of 2011 on August 2, 2011...
that would produce debt reduction legislation by November 23, 2011, that would be immune from amendments or filibusterFilibusterA filibuster is a type of parliamentary procedure. Specifically, it is the right of an individual to extend debate, allowing a lone member to delay or entirely prevent a vote on a given proposal...
. The goal of the legislation is to cut at least $1.5 trillion over the coming 10 years and should be passed by December 23, 2011. The committee would have 12 members, 6 from each party. - Projected revenue from the Joint Select Committee's legislation must not exceed the revenue baselineBaseline (Budgeting)Baseline budgeting is a method of developing a budget which uses existing spending levels as the basis for establishing future funding requirements. The concept assumes that the organization is generally headed in the right direction and only minor changes in spending levels will be required...
produced by current law. - The agreement specified an incentive for Congress to act. If Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts, then Congress can grant a $1.2 trillion increase in the debt ceiling. This would trigger across-the-board cuts ("sequestration") of spending, equally split between defense and non-defense programs. The cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee. The sequestration mechanism is the same as the Balanced Budget Act of 1997Balanced Budget Act of 1997The Balanced Budget Act of 1997, , was signed into law on August 5, 1997. It was an omnibus legislative package enacted using the budget reconciliation process and designed to balance the federal budget by 2002....
. There are exemptions—across the board cuts would apply to Medicare, but not to Social Security, Medicaid, civil and military employee pay, or veterans. - Congress must vote on a Balanced Budget AmendmentBalanced Budget AmendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
between October 1, 2011, and the end of the year. - The debt ceiling may be increased an additional $1.5 trillion if either one of the following two conditions are met:
- A balanced budget amendment is sent to the states
- The joint committee cuts spending by a greater amount than the requested debt ceiling increase
Most of the $900 billion in cuts occur in future years, and so will not remove significant capital from the economy in the current and following year. The across-the-board cuts could not take place until 2013. If they are triggered, a new Congress could vote to eliminate or deepen all or part of them. Boehner was reported to be particularly concerned that any defense cuts could not go into effect until after 2013. The President may make the specified increases, but to stop them, the Congress must pass a bill to disapprove of them by the two-thirds majority needed to override a veto.
The agreement, entitled the Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...
, passed the House on August 1, 2011, by a vote of 269–161; 174 Republicans and 95 Democrats voted for it, while 66 Republicans and 95 Democrats voted against it. The Senate passed the agreement on August 2, 2011, by a vote of 74–26; seven Democrats and 19 Republicans voted against it. Obama signed the bill shortly after it was passed by the Senate.
US reaction
The national debt rose $238 billion (or about 60% of the new debt ceiling) on August 3, the largest one-day increase in the history of the United States. The US debt surpassed 100 percent of gross domestic product for the first time since World War IIWorld War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
. According to the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
, the US joined a group of countries whose public debt exceeds their GDP. The group includes Japan (229 percent), Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
(152 percent), Jamaica
Jamaica
Jamaica is an island nation of the Greater Antilles, in length, up to in width and 10,990 square kilometres in area. It is situated in the Caribbean Sea, about south of Cuba, and west of Hispaniola, the island harbouring the nation-states Haiti and the Dominican Republic...
(137 percent), Lebanon
Lebanon
Lebanon , officially the Republic of LebanonRepublic of Lebanon is the most common term used by Lebanese government agencies. The term Lebanese Republic, a literal translation of the official Arabic and French names that is not used in today's world. Arabic is the most common language spoken among...
(134 percent), Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
(120 percent), Ireland (114 percent), and Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
(103 percent).
The NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
, ASX
ASX
ASX may refer to:* Australian Securities Exchange, the primary stock exchange of Australia* Advanced Stream Redirector, a computer file format listing Windows Media files * Armstrong Siddeley ASX, a British experimental turbojet* John F...
, and S&P 100
S&P 100
The S&P 100 Index is a stock market index of United States stocks maintained by Standard & Poor's.Index options on the S&P 100 are traded with the ticker symbol "OEX". Because of the popularity of these options, investors often refer to the index by its ticker symbol.The S&P 100, a subset of the...
lost up to four percent in value, the largest drop since July 2009, during the global financial crisis
Late-2000s financial crisis
The late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
that was precipitated in part by the United States housing bubble
United States housing bubble
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
and the corresponding losses by holders of mortgages and mortgage-backed securities
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
. The commodities market also took losses, with average spot crude oil prices falling below $US86 a barrel. The price of gold fell, as deepening losses on Wall Street prompted investors to sell.
On August 5, 2011, Standard & Poor's credit rating agency downgraded the long-term credit rating of the United States government for the first time in its history, from AAA to AA+: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics". A week later, S&P senior director Joydeep Mukherji said that one factor was that numerous American politicians expressed skepticism about the serious consequences of a default—an attitude that he said was "not common" among countries with a AAA rating. The other two major credit rating agencies, Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
and Fitch, continued to rate the federal government's bonds as AAA.
In a joint press release on the same day from the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
, the National Credit Union Administration
National Credit Union Administration
The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...
, and the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
, federally regulated institutions were told that for risk-based
Risk-based pricing
Risk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees...
capital purposes, the debt of the United States was still considered to be risk free
Risk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
.
Congressional reaction
- Senate Minority Leader Mitch McConnellMitch McConnellAddison Mitchell "Mitch" McConnell, Jr. is the senior United States Senator from Kentucky and the Republican Minority Leader.- Early life, education, and military service :...
, on the GOP: "I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn't think that. What we did learn is this – it's a hostage that's worth ransoming. And it focuses the Congress on something that must be done."
International reaction
The international communityInternational community
The international community is a term used in international relations to refer to all peoples, cultures and governments of the world or to a group of them. The term is used to imply the existence of common duties and obligations between them...
characterized the political brinkmanship
Brinkmanship
Brinkmanship is the practice of pushing dangerous events to the verge of disaster in order to achieve the most advantageous outcome...
in Washington as playing a game of chicken
Chicken (game)
The game of chicken, also known as the hawk-dove or snowdrift game, is an influential model of conflict for two players in game theory...
, and criticized the US government for "dangerously irresponsible" actions.
International reaction to the US credit rating downgrade has been mixed. Australian Prime Minister Julia Gillard
Julia Gillard
Julia Eileen Gillard is the 27th and current Prime Minister of Australia, in office since June 2010.Gillard was born in Barry, Vale of Glamorgan, Wales and migrated with her family to Adelaide, Australia in 1966, attending Mitcham Demonstration School and Unley High School. In 1982 Gillard moved...
urged calm over the downgrade, since only one of the three major credit rating agencies decided to lower its rating. On August 6, 2011, China, the largest foreign holder of United States debt, said that Washington needed to "cure its addiction to debts" and "live within its means". The official Xinhua News Agency
Xinhua News Agency
The Xinhua News Agency is the official press agency of the government of the People's Republic of China and the biggest center for collecting information and press conferences in the PRC. It is the largest news agency in the PRC, ahead of the China News Service...
was critical of the US government, questioned whether the US dollar should continue to be the global reserve currency, and called for international supervision over the issue of US dollar.
The downgrade started a sell-off in every major stock market index
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
around the world, threatening a stock market crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
in the international markets. The G7 finance minister
Finance minister
The finance minister is a cabinet position in a government.A minister of finance has many different jobs in a government. He or she helps form the government budget, stimulate the economy, and control finances...
s scheduled a meeting to discuss the "global financial crisis that concerns all countries."
Political aftermath
The aftermath of the debt-ceiling crisis caused the Tea PartyTea Party movement
The Tea Party movement is an American populist political movement that is generally recognized as conservative and libertarian, and has sponsored protests and supported political candidates since 2009...
, which was seeing its support somewhat wane prior to the crisis to lose support among many Americans as many House Republican supporters of the movement opposed raising the debt ceiling under any circumstances. In a poll taken shortly after the deal was signed by the President, 40 percent of Americans held an unfavorable view of the movement, with only 20 percent supporting it. Republicans were viewed as holding most of the responsibility for the dispute. In a September 27 poll taken by CNN
CNN
Cable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
and the ORC International
ORC International
ORC International is a leading market research agency and the global research operating unit of Opinion Research Corporation. The company's UK headquarters are located at 186 City Road, Londonadjacent to Silicon Roundabout, with another office in Manchester....
, 53 percent of Americans polled held a negative view of the Tea Party, with just 28 percent supporting it.
Timeline
Although the US has raised its debt ceiling many times before 2011, these increases were not generally coupled with an ongoing global economic crisis.- December 16, 2009: The debt ceiling was exceeded. To avoid default, the Treasury Department used "extraordinary accounting tools" to enable the Treasury to make an additional $150 billion available to meet the necessary federal obligations.
- February 12, 2010: Increase in the debt ceiling signed into law by President Obama, after being passed by the Democratic 111th United States Congress111th United States CongressThe One Hundred Eleventh United States Congress was the meeting of the legislative branch of the United States federal government from January 3, 2009 until January 3, 2011. It began during the last two weeks of the George W. Bush administration, with the remainder spanning the first two years of...
. It increased the debt ceiling by $1.9 trillion from $12.394 trillion to $14.294 trillion. - February 18, 2010: Obama issued an Executive OrderExecutive orderAn executive order in the United States is an order issued by the President, the head of the executive branch of the federal government. In other countries, similar edicts may be known as decrees, or orders in council. Executive orders may also be issued at the state level by a state's governor or...
to establish the National Commission on Fiscal Responsibility and Reform, also known as the Bowles-Simpson Commission. The mission of the Commission was to propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. It was tasked to issue a report with a set of recommendations by December 1, 2010. - November 2, 2010: The Republican Party gained 63 seats in the US House of Representatives in the United States midterm electionsUnited States elections, 2010The 2010 United States elections were held on Tuesday, November 2, 2010. During this midterm election year, all 435 seats in the United States House of Representatives and 37 of the 100 seats in the United States Senate were contested in this election along with 38 state and territorial...
, recapturing the majority by 242–193 in the 112th Congress. Major planks for the House Republicans during the election campaign were cutting federal spending and stopping any tax increases. - December 1, 2010: The Bowles-Simpson Commission on Fiscal Responsibility and Reform issued its report, but the recommendations failed to win support of at least 14 of the 18 members necessary to adopt it formally. The recommendations were never adopted by Congress nor President Obama.
- January 6, April 4, and May 2, 2011: Secretary of the TreasuryUnited States Secretary of the TreasuryThe Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
Timothy Geithner sent letters requesting an increase in the debt ceiling. - January 25, 2011: Senator Pat ToomeyPat ToomeyPatrick Joseph "Pat" Toomey, Sr. is the junior United States Senator for Pennsylvania and a member of the Republican Party. Previously, Toomey served as a U.S. Representative for three terms, but did not seek a fourth in compliance with a pledge he had made while running for office in 1998...
introduces the Full Faith And Credit Act bill [S.163] that would require the Treasury to prioritize payments to service the national debt over other obligations. The bill was never debated. - January 28, 2011: Moody's Investors Service said it may place a "negative" outlook on the AAA rating of US debt sooner than anticipated, as the country's budget deficit widened.
- February 14, 2011: Obama released his budget proposal for fiscal year 2012. Republicans criticized the budget for doing too little to rein in the burgeoning US deficit. The CBO analysis, released in April 2011, estimated that the budget would increase total deficits over 10 years by $2.7 trillion: from $6.7 trillion of the March 2011 baseline to $9.4 trillion with the proposed budget. The Senate rejected the budget proposal on May 25, 2011 (see below).
- April 14, 2011: Both the House of Representatives and the Senate voted in favor of the 2011 US federal budget2011 United States federal budgetThe 2011 United States federal budget is the United States federal budget to fund government operations for the fiscal year 2011, which is October 2010–September 2011. The budget is the subject of a spending request by President Barack Obama...
, 260–167 and 81–19 respectively. This budget projected the 2011 deficit to be $1.645 trillion, and therefore ensured that the debt ceiling would be hit during this fiscal year. - April 15, 2011: On a party-line vote 235–193, the House of Representatives passed the Republican 2012 budget proposalThe Path to ProsperityThe Path to Prosperity was the Republican Party's budget proposal for the year 2012. It competed with budget proposals outlined separately by President Barack Obama. and the Congressional Progressive Caucus. The Republican proposal was formalized and passed by the House of Representatives on...
aimed to reduce total spending by $5.8 trillion and reduce total deficits by $4.4 trillion over 10 years compared to the current-policy baseline. It included reform to Medicare and Medicaid entitlement programs, which the Democrats criticized as an attempt to leave seniors and poor holding the bag on health care costs. The criticism resonated with the many in the public, who voiced opposition to the proposed changes. The Senate rejected the budget proposal on May 25, 2011 (see below). - April 18, 2011: Standard & Poor's Ratings Services revised its outlook on the US to negative due to recent and expected further deterioration in the US fiscal profile, and of the ability and willingness of the US to soon reverse this trend. With the negative outlook, S&P believed there is a likelihood of at least one-in-three of a downward rating adjustment within two years.
- May 16, 2011: The debt ceiling is reached. Treasury Secretary Timothy Geithner issued a debt issuance suspension period, directing the Treasury to utilize "extraordinary measures" to fund federal obligations.
- May 18, 2011: Bipartisan deficit-reduction talks among the "Gang of Six" high-profile Senators are suspended when Republican Tom CoburnTom CoburnThomas Allen "Tom" Coburn, M.D. , is an American politician, medical doctor, and Southern Baptist deacon. A member of the Republican Party, he currently serves as the junior U.S. Senator from Oklahoma. In the Senate, he is known as "Dr. No" for his tendency to place holds on and vote against bills...
drops out. - May 24, 2011: Vice President Joe BidenJoe BidenJoseph Robinette "Joe" Biden, Jr. is the 47th and current Vice President of the United States, serving under President Barack Obama...
and four Democratic lawmakers begin meeting with the Republican House Majority LeaderParty leaders of the United States House of RepresentativesParty leaders of the United States House of Representatives are elected by their respective parties in a closed-door caucus by secret ballot and are also known as floor leaders. The U.S. House of Representatives does not officially use the term "Minority Leader", although the media frequently does...
Eric CantorEric CantorEric Ivan Cantor is the U.S. Representative for Virginia's 7th congressional district, serving since 2001. A member of the Republican Party, he became House Majority Leader when the 112th Congress convened on January 3, 2011...
and the Republican Senate Minority WhipAssistant party leaders of the United States SenateThe Assistant Majority and Minority Leaders of the United States Senate are the second-ranking members of the party leadership of the United States Senate....
Jon KylJon KylJon Llewellyn Kyl is the junior U.S. Senator from Arizona and the Senate Minority Whip, the second-highest position in the Republican Senate leadership. In 2010 he was recognized by Time magazine as one of the 100 most influential people in the world for his persuasive role in the Senate.The son...
, in an effort to continue the talks. Cantor said that these talks would lay the groundwork for further discussions between President Obama, Republican Speaker of the HouseSpeaker of the United States House of RepresentativesThe Speaker of the United States House of Representatives, or Speaker of the House, is the presiding officer of the United States House of Representatives...
John BoehnerJohn BoehnerJohn Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...
, and other leaders of Congress. - May 25, 2011: The Senate rejected both the Republican House budget proposal, by a vote of 57–40, and the Obama budget proposal, by a vote of 97–0.
- May 31, 2011: The House voted on a bill to raise the debt ceiling without any spending cuts tied to the increase. President Obama asked Congress to raise the debt ceiling in a 'clean' vote that included no other conditions. The bill, which would have raised the debt ceiling by $2.4 trillion, failed by a vote of 97–318. Democrats accused Republicans of playing politics by holding a vote they knew would fail.
- June 23, 2011: Biden's negotiations on the debt ceiling were cut off when both Eric Cantor and Jon Kyl walk out over disagreements on taxes.
- July 19, 2011: The Republican Majority in the House brought the Cut, Cap and Balance ActCut, Cap and Balance ActThe proposed Cut, Cap and Balance Act of 2011 was a bill put forward in the 112th United States Congress by Republicans during the 2011 U.S. debt ceiling crisis...
(H.R.2560), their proposed solution to the crisis, to a vote. They passed the bill by a vote of 234–190, split closely along party lines: 229 Republicans and 5 Democrats 'for', 181 Democrats and 9 Republicans 'against'; it was sent to the Senate for consideration. The Bill authorized that the debt ceiling be raised by $2.4 trillion after a Balanced Budget AmendmentBalanced Budget AmendmentA balanced-budget amendment is a constitutional rule requiring that the state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government....
was passed by Congress. Since Constitutional amendments require a two-thirds majority vote in both chambers of Congress to pass, a vote for a Balanced Budget Amendment would require more support than the Cut, Cap and Balance Act bill achieved in the House vote. - July 22, 2011: The Senate voted along party lines to table the Cut, Cap and Balance Act; 51 Democrats voting to table it and 46 Republicans voting to bring it to a debate. Senate Majority LeaderParty leaders of the United States SenateThe Senate Majority and Minority Leaders are two United States Senators who are elected by the party conferences that hold the majority and the minority respectively. These leaders serve as the chief Senate spokespeople for their parties and manage and schedule the legislative and executive...
Harry ReidHarry ReidHarry Mason Reid is the senior United States Senator from Nevada, serving since 1987. A member of the Democratic Party, he has been the Senate Majority Leader since January 2007, having previously served as Minority Leader and Minority and Majority Whip.Previously, Reid was a member of the U.S...
called the Act "one of the worst pieces of legislation to ever be placed on the floor of the United States Senate." Even had it passed Congress, Obama had promised to veto the bill. - July 25, 2011: Republicans and Democrats outlined separate deficit-reduction proposals.
- July 25, 2011: Obama and Speaker of the House John BoehnerJohn BoehnerJohn Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...
addressed the nation separately over network television with regards to the debt ceiling. - July 25, 2011: The bond market is shaken by a single $850 million futures trade betting on US default.
- July 29, 2011: The Budget Control Act of 2011Budget Control Act of 2011The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...
, a Republican bill that immediately raised the debt ceiling by $900 billion and reduced spending by $917 billion, passed in the House on a vote of 218–210. No Democrats voted for it, and it also drew 'no' votes from 22 Republicans, who deemed it insufficiently tough on spending cuts. It allows the President to request a second increase in the debt ceiling of up to $1.6 trillion upon passage of the balanced-budget amendment and a separate $1.8 trillion deficit reduction package, to be written by a new "joint committee of Congress." Upon introduction into the Senate in the evening, the bill was immediately tabled on a 59–41 vote, including some Republican votes. - July 30, 2011: The House of Representatives voted 173–246 to defeat Senate Majority Leader Harry Reid's $2.4 trillion plan to reduce the deficit and raise the debt ceiling.
- July 31, 2011: President Barack Obama announced that leaders of both parties had reached an agreement to lift the debt ceiling and reduce the federal deficit. Separately, House Speaker John BoehnerJohn BoehnerJohn Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...
told Republicans that they had reached the framework for an agreement. Boehner revealed details of the agreement in a presentation to the House Republicans. - August 1, 2011: The House passed a bipartisan bill by a vote of 269–161. 174 Republicans and 95 Democrats voted 'yes'; 66 Republicans and 95 Democrats voted 'no'.
- August 2, 2011: The Senate passed the bill by a vote of 74–26. 28 Republicans, 45 Democrats, and 1 independent voted 'yes'; 19 Republicans, 6 Democrats, and 1 independent voted 'no'. President Obama signed the debt ceiling bill the same day, thus ending fears of a default. Obama also declared that the bill is an "important first step to ensuring that as a nation we live within our means."
- August 2, 2011: The date estimated by the Department of the Treasury that the borrowing authority of the US would be exhausted, if the debt ceiling crisis were not resolved.
- August 5, 2011: Standard & Poor'sStandard & Poor'sStandard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
lowered the credit rating of the United States from AAA to AA+, deciding that the budget plan that was passed did not go far enough to address the country's debt. It also warned that it is pessimistic about the nation's fiscal outlook. - August 9, 2011. The US Federal Reserve announced it will keep interest rates at "exceptionally low levels" at least through mid 2013; it made no commitment for further quantitative easingQuantitative easingQuantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
. (Reuters) The Dow Jones Industrial AverageDow Jones Industrial AverageThe Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
and the New York Stock ExchangeNew York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
as well as other world stock markets, recovered after recent falls. (Wall Street Journal) - August 15, 2011: The date estimated by the Fitch rating agency and the FRBNYFederal Reserve Bank of New YorkThe Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
primary dealer Jefferies & Co that $29 billion of federal debt interest would have become due, thus triggering a technical sovereign defaultSovereign defaultA sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...
if the debt ceiling crisis had not been resolved. This, however, did not occur as the debt ceiling crisis was resolved by then.
See also
- Budget Control Act of 2011Budget Control Act of 2011The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...
- United States Congress Joint Select Committee on Deficit ReductionUnited States Congress Joint Select Committee on Deficit ReductionThe Joint Select Committee on Deficit Reduction, colloquially referred to as the Supercommittee, is a joint select committee of the United States Congress, created by the Budget Control Act of 2011 on August 2, 2011...
- United States federal government credit-rating downgrade, 2011United States federal government credit-rating downgrade, 2011Credit rating agency Standard & Poor's downgraded its credit rating of the U.S. federal government from AAA to AA+ on August 5, 2011.This was the first time the government was given a rating below AAA. S&P had announced a negative outlook on the AAA rating in April 2011...
- History of United States debt-ceiling increasesHistory of United States debt-ceiling increasesThe United States has raised its Debt Ceiling many times before the United States debt-ceiling crisis of 2011. These increases were not usually coupled with an ongoing global economic crisis...
- Late-2000s financial crisisLate-2000s financial crisisThe late-2000s financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s...
- United States federal government shutdown of 1995 and 1996
- European sovereign debt crisis
External links
- "Apple now has more cash than the U.S. government". CNN. July 29, 2011.