The Sixteen Trillion Dollar Question
There aren’t many quiz shows left on TV but among history’s most famous was The $64,000 Question. It was broadcast on CBS from 1955 to 1958, based on an earlier radio version with a top prize of just $64. It was a huge ratings success until the scandal involving the competing quiz show Twenty-One and its winner Charles Van Doren made the news. In order to keep ratings high, the sponsors of both shows influenced producers to select appealing winners in advance, then supply them with answers in various ways. When this story broke, Twenty-One was cancelled immediately and The $64,000 Question followed soon thereafter.
Even allowing for inflation, increasing a question’s value from $64,000 to $16,000,000,000,000 takes considerable effort, or perhaps, a concerted lack of effort. As I write this article, the 2012 elections are just weeks away and Congress is functionally in recess with members having returned home to run for reelection. In their absence, of course, nothing is being done about either developing a balanced budget or dealing with those sections of the tax code which are due to expire at year-end.
In the meantime, the government must continue to function and it’s the job of the Department of the Treasury to keep money flowing. Their efforts allow our elected officials to continue receiving paychecks and other agencies to pay their bills too. Everyone knows that our economy is just coming out of recession, so it’s no surprise that people and companies aren’t earning as much as they once did. Of course, reduced levels of income mean the IRS isn’t collecting as much in the way of tax dollars. When there’s not enough income to cover expenses, anyone might borrow a little money to fill the gap. In this case, the Treasury has borrowed about $16.1 trillion.
We all know that history sometimes repeats itself. Please take a moment to think back to August of 2011 and you may recall a similar situation. At the time, our debt limit of $14.5 trillion was rapidly being approached. One response to the looming crisis would have been Congressional action resulting in a balanced (or at least a more balanced) budget but that was not to be. Instead, the borrowing limit was raised to the current $16.4 trillion level through the Budget Control Act of 2011. That allowed everyone to breathe a sigh of relief, certain that the issue would be dealt with in plenty of time to avoid another crisis. Unfortunately, Congress has done nothing more than point fingers across the aisle and we are currently facing yet another crisis, this one described as the “fiscal cliff”.
With borrowings of $16.1 trillion and a limit of $16.4 trillion, something needs to be done. The Treasury has several tools it can employ to stay below the limit but they are short term in nature and are very obvious when put into use. There’s no hiding the fact that our government will once again be facing some difficult decisions. Last year’s crisis brought significantly increased market volatility and a reduction of the country’s credit rating. That rating downgrade was generally unanticipated but this year all three major agencies have our government’s debt on watch for a further downgrade. The agencies have said they’re likely to take such action unless:
- Congress produces “specific policies” that will stabilize the negative debt-to-GDP trend (which is forcing increased borrowing);
- Their efforts succeed without leading to a significant fiscal shock which would limit the ability of the economy to rebound;
- The process for another debt increase is orderly, avoiding additional market volatility, and most importantly;
- An agreement about increasing the debt ceiling is reached before the Treasury is forced to put those short-term tools to work.
I would not expect another round of downgrades to produce disastrous results: they didn’t last time and the possibility of additional ones has been loudly telegraphed by the rating agencies. As cynical as I am about politics, I believe our economy is inherently strong and that it can weather this storm if reasonable accommodations take place within a reasonable time. Unfortunately, at least to the best of my knowledge, no producer is standing in the wings ready to feed answers to the contestants. Congress will have to come up with them on its own and – just like on live TV – everyone’s watching.