Of the 3 major battles that are in process, the Fiscal cliff, the delayed spending cuts and the debt ceiling, the debt ceiling holds the most danger to the economy and the country. The reasons have to do mostly with the dollar amounts are larger, those larger cuts are more sudden and the bond rating agencies have targeted a debt ceiling fight as a bellwether of whether they will downgrade the countries credit rating again.
Let’s compare all three. In the most recent fiscal cliff battle, revenue rates were increased for those earning over $400,000 per year form 36% to 39%. Those with incomes over $400,000 represent approximately 1% of the population. Spending cuts were supposed to take place in the range of $1.6 trillion over 10 years through and where those cuts are supposed to occur is still a matter of debate. Republican House Speaker John Boehner
(R) – Ohio, Senate Majority leader Mitch McConnell, (R) – Kentucky, and many in the rank and file membership of the House and Senate want to have major cuts in entitlement programs such as Medicare and other Government programs, possibly including the department of Education, the EPA, Environmental Protection Agency, and many others.
The most significant fact is that the cuts are supposed to be approximately $1.6 trillion over 10 years, which represents $160 billion per year, which represents only approximately 5% of the Government’s budget per year.
– The debt ceiling is much more dangerous for 2 reasons. If it is not raised, it represents
a much larger cut, 40% to 45% immediately versus the 5% or somewhat larger cut being
negotiated in spending within the next 60 days.
Example of the numbers:
The government’s current budget is approximately $3.4 trillion dollars per years. At the same time, government takes in approximately $2.2 trillion dollars per year in revenues, creating an approximate $1.2 trillion dollar budget deficit. It has to borrow the difference. If the debt ceiling is not raised, it cannot borrow any money. This means the government will have operate on $2.2 trillion per year instead of $3.4 trillion. A shock of 40% plus in spending cuts will trigger massive austerity reductions in programs. If these occur, expect the shock to immediately reverberate through the general public within days or less.