ikkyu2 (99.51)

Two Conversations About Debt

July 27, 2011 – Comments (3)

 two separate conversations we need to be having about the debt ceiling; and I feel like some interlocutors are confusing or conflating the two conversations.

The other conversation goes like this:  Debt gets entered two place on the balance sheet; you get the cash as a short term asset and you get the obligation of repayment as a long term liability.  Eventually the debts come due, at which time they are no longer longterm liabilities; they have become current liabilities. 

However, debt repayments (principal and interest) are not the only government liabilities that exist.  The US government has other liabilities: federal workers' salaries and benefits; Medicare payments to doctors, hospitals, pharmacy benefit managers, and etc; salaries and benefits of soldiers; payment for goods the government buys; and so on.  Some of these liabilities were incurred years or decades ago by contract.  Some are recurring liabilities, by contract.  Very few of these contracts can be unilaterally abrogated by Congress with no notice.  They are promises that were already made, and in some cases regarding payment for goods and services that have already been delivered.

An example would be a Medicare payment for a patient I saw in July.  The care is already delivered and Medicare has already promised to pay for valid claims for delivering that care.  That's a current liability of the Federal Government.  Medicare payments make up 70% of my office revenue; a month with no Medicare payments for work already done would force me to close my doors.

At this point government current revenue does not cover all government current liabilities, so money is borrowed to make up the shortfall routinely.  

The second conversation, that goes like this, asks these questions: Is the US government going to pay the liabilities it has incurred in the past?  Is it going to keep the promises it made when it contracted to make future payments?  Or is the US government going to default on those obligations?  That is a separate conversation from the one you mentioned, the one about deciding what kind of debt we should and shouldn't be taking on.  Some liabilities have already been taken on and now is too late to be deciding whether we should have done that or not.

Unfortunately, in order to pay these liabilities, the US Gov't must currently borrow money which it can use to pay its liabilities.  It does not have enough revenue to pay all its liabilities as of Aug 2.  There is no other way to make up the shortfall at this point.  Raising taxes now would not work because the taxes would only be in effect for 5 days. Cutting borrowing or spending now would not work because these are liabilities that have already been incurred, in the past.  

The conversation about whether government should increase its revenues, cut its spending, change what it's spending its money on, change who it's borrowing from, cut its borrowing, or all, some or none of the above; is not relevant now to the conversation about whether or not the US Government is going to be paying its current liabilities.  Both sides are pitching these two conversations as though they were really one conversation, a conversation that must be completed right now.  That's not correct.