When a ceiling is not a ceiling

Hughey Newsome Advisory Council, Project 21
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Over the coming days, be prepared for more discussions concerning the next debt ceiling crisis.

Last month, Treasury Secretary Jack Lew warned that the current pace of federal spending would require an increase in the debt ceiling. In a February 3 speech, Lew reiterated: “The bottom line is time is short.”

Expect the standard positions to be taken. One political party will likely warn of the need to address deficits, while the other will portray unwillingness to allow the government to continue spending as unpatriotic.

Unfortunately, the roles seem to switch depending on which party holds power. The one constant is that the national debt continues to grow as the movable debt ceiling continues to be increased.

It defies the definition of the term “ceiling.”

By now, conservatives can recite the numbers by heart. The national debt has risen to over $17 trillion. It’s increased over $6 trillion since Barack Obama took office. While these figures are important in judging this administration’s spending habits, it is the (gross) debt-to-gross domestic product (GDP) ratio that should alarm each and every citizen.

Economists use this ratio as a gauge of a nation’s fiscal health. For the United States, the International Monetary Fund (IMF) reported a ratio exceeding 106 percent at the end of the 2012 fiscal year. This means America owes more than what every man, woman or business produces each year — the GDP.

In that, the United States is doing just a bit better than Singapore, Grenada, and Ireland. In fact, of the 173 nations for which the IMF reported (gross) debt-to-GDP ratios, only ten have higher ratios.

Some may argue that credit agencies continue to rate U.S. debt as top-notch — so there’s no problem. It’s true that Moody’s and Fitch have never downgraded the rating of U.S. debt (even though they have both issued warnings), but Standard and Poor’s (S&P) did so in 2011 after that year’s debt ceiling fight.

Before the S&P downgrade, the United States enjoyed an AAA credit rating. Of the ten nations with higher debt-to-GDP ratios, only one had a AAA credit rating. Four had speculative — junk — credit ratings.

The decisions of the other credit rating agencies to maintain their good ratings may seem odd to some, considering America’s poor debt ratio. With that in mind, consider that S&P alone is now at the center of a Justice Department lawsuit for activities related to the financial crisis of 2008-2009.

Is there a reason to be concerned?

According to a Wall Street Journal op-ed, “S&P and Downgrade Payback,” investigations centered on Moody’s and S&P — the two largest agencies — yet only S&P earned a $5 billion federal lawsuit. The article further speculated that the downgrade, not solely S&P’s activities leading up to the financial crisis, motivated the Justice Department’s legal action.

Political pressure may be discouraging possibly legitimate downgrades of America’s debt rating. Those same tactic are used to de-fang deficit hawks.

Consider that the federal government itself issues lending guidelines for taxpayers to get a loan guarantee on mortgages (FHA mortgage insurance) that taxpayers fund. These guidelines say mortgage debt cannot exceed a certain amount. There is no avenue through which this limit can be avoided, and it certainly is not a “movable” ceiling by any stretch of the imagination. Additionally, credit scores are used as part of the FHA guidelines.

Unfortunately, Attorney General Eric Holder has not made the Department of Justice available when individual taxpayers have grievances with their credit scores.

Perhaps, someday, the principles that the federal government itself uses to limit over-leverage in loan-seekers will eventually be used to protect taxpayers from the consequences of runaway government spending.