Saturday, August 6, 2011

Debt Ceiling Deal: Nothing Is Being Cut

Here is some real eye-opening news.

During the last few weeks, there has been a non-stop soap opera in Washington about the federal government’s “debt ceiling”. Much of the debate has been about whether the government should cut spending or raise taxes or do some combination of both in order to get the deficit under control. We’ve heard about this plan that will cut X trillion in spending, and that plan that will cut Y trillion, and the compromise plan that will cut Z trillion.

You know all of that; it’s not news.

Here’s the news that has barely been mentioned because the big-spending, big government, career politicians don’t want you to be aware of it: Nothing is being cut, in any of these plans. Nothing.

Then why do we hear from supposedly legitimate news media that federal spending is being cut, with the only debate about how much, you ask. Dear reader, let me explain.

The federal budget is on autopilot that results in across-the-board increases occurring every year, automatically. It’s called “base line budgeting”, and here’s how it works.

Every year, the proposed federal budget increases from the previous year by eight percent. This increased budget proposal becomes the “baseline” for budget negotiations. If it is suggested that the budget should not increase by the proposed amount but by some lesser amount instead, which is still an increase over the previous year, that suggestion is scored by the Congressional Budget Office (CBO) as a “cut”.

Stay with me on this, because it’s vitally important.

Let’s put some hypothetical numbers on it as an example. We’ll say that last year’s federal budget was $100 (you can put as many zeros on that as you want). The budget proposal for this year will come out initially as $108. If this proposed budget were reduced to, say, $105, it would be billed as a cut.

Hypothetical Example – Federal Budget Process
Last year’s federal budget: $100
Initial budget proposal for this year (the baseline): $108
Final budget for this year: $105
Scored as a $3 cut.

That’s right, even though the federal budget went up from one year to the next in this example, it’s called a “cut” in politician-ese. That’s how baseline budgeting works; it’s designed to mislead the public so that politicians can claim they’re cutting the budget when in actuality the budget is going up.

Now for the coup-de-grace. Under all the plans being debated recently in Congress concerning the federal debt ceiling, government spending will rise across the board, in some estimates by seven to nine trillion dollars over the next ten years. Nothing is being cut! Yet we hear about how these various plans will cut spending by so many trillion. That’s the intended effect of baseline budgeting, letting politicians call an increase a cut.

Let’s move on to two other fundamental dishonesties that are rampant in the debt ceiling debate.

There has been a lot of talk about the U.S. Government’s credit rating possibly being lowered from AAA to AA+. What is this all about?

When a lender loans money to a borrower, the lender wants to know ahead of time the likelihood of the borrower being able to pay back the loan and the interest. That need led to credit ratings.

If a borrower is unable to pay the interest or principle on the loan, they are said to have defaulted on the loan.

Everyone probably knows about their credit score and how a good score makes it easier for an individual to borrow money and to get a lower interest rate. That’s because the higher a person’s credit score is, the less likely they will default on a loan.

Government entities (and companies) are rated in a similar manner by the major credit agencies, Moody’s and Standard and Poors (S&P). Triple A is the highest rating. The U.S. Government has always had a AAA rating because there is almost no chance that it won’t be able to pay the interest on borrowed money or the principle amount when the time comes.

Throughout this federal debt ceiling saga, one of the major reasons given as to why we must raise the debt ceiling is to prevent the federal government from defaulting on it’s loans (bonds), and to keep its credit rating from being downgraded.

The truth is that even if the debt ceiling is not raised, the government will not default on it’s bonds. There will still be tax money coming in, and there will be enough to pay the interest on the bonds, even though other areas of spending would have to go without in that scenario. But a default would not occur.

Next truth factoid: No matter which plan concerning the debt ceiling is finally adopted, the U.S. Government’s credit rating will go down. S&P has already said that neither of the final two proposed plans reduces federal spending enough such that Uncle Sam’s AAA rating can be maintained.

Here are the salient points we can distill out of all of this blathering and disingenuineness about the debt ceiling:
1. Nothing is being cut.
2. The federal government will not default on its loans (bonds).
3. The federal government’s credit rating will be downgraded no matter which debt ceiling plan Congress adopts since none of them are serious about balancing the federal budget.

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