There has been a lot of talk about August 2nd. This is the supposed date that the federal governments ability to borrow money runs out. Washington makes it either too complicated or too simplistic such as when President Obama said he can’t guarantee Social Security checks would be mailed on the August 3rd.

It really is pretty straight forward and here are the basics facts. Consider sharing them with those you know.

Underlying everything is the fact that our federal government has grown so large that, while estimates vary, it seems that we borrow about 40 cents of every dollar spent.

In order to continue the borrowing to fund this spending, congress must increase the credit limit of the United States credit card. In Washington speak this is referred to as the debt limit. Two thirds of Americans believe raising the credit limit is a bad idea. The President says Americans just don’t understand (Video here).

Republicans, under pressure from over 100 new congressmen, who campaigned on cutting spending, are insisting that no new taxes be raised and that any increase in the credit limit be offset by equal spending cuts.

Democrats, led by the President, are insisting that the increase should be covered by a combination of cuts and “new revenue,” This is another term for new taxes. They desire to do this, not by raising rates, but by taking away business deductions. Like individuals who are allowed to deduct home mortgage insurance, certain medical costs and charitable contributions, businesses are allowed to deduct from their income certain costs of doing business such as the purchase of new equipment.

Large spending cuts are not unprecedented. Coming out of WWI the county faced conditions similar to what we face now. Very high unemployment and large federal deficits. President Harding and a republican congress, to warnings of doom, cut the federal budget by 50% and slashed tax rates. Within two years unemployment was reduced by half and the county enjoyed the boom period known as the roaring 20’s. You can read about it here.

There is the typical smoke and mirrors going on here. Both sides have targeted an agreement to raise the ability to borrow $2.4 trillion ($2,400,000,000,000). This amount would keep the politicians from having to revisit this subject until after the 2012 elections. Convenient.

UPDATE – As of 7-25 The House Republicans have moved to pass a short term deal that would increase the debt limit by $1 trillion in return for 1.2 trillion in cuts in the short term budget.  They are also demanding that both the House and Senate hold a vote on a Balanced Budget amendment before any additional votes are held on raising the debt in the future.

If no agreement is reached, the US Treasury Secretary says that the countries credit limit will be reached.

So just what would that mean?

It means that the federal government would have to function on only the revenues that come in every day. The majority of this is from income taxes and social security/medicare payroll withholdings.

So how bad would it be?

The Washington Examiner reports the following:

Here are the facts, as reported by MarketWatch and the Bipartisan Policy Center. You do the math:

* The federal government receives approximately $200 billion in revenues each month.

* Interest on the national debt in August will be approximately $29 billion.

* Social Security will cost about $49. 2 billion.

* Medicare and Medicaid will cost about $50 billion.

* Active duty military pay will cost about $2.9 billion.

* Veterans affairs programs will cost about $2.9 billion.

So with existing revenues the President can pay its debt, cover Social Security payments, cover the rest of the items above and still have $39 Billion a month to pay for other government programs. Spending would be cut roughly 44%.

So a threat by the President that seniors and veterans won’t be paid is just that. a threat. The only way they wouldn’t get paid is if the President were to chose to pay for other government programs first.

Two other lessons that you won’t see mentioned by most of the news media.

  • This process has exposed the lie that there is a social security trust fund sitting in the bank. If you are new to this subject I suggest you watch this short video on the subject.
  • The $2.4 trillion increase in the debt limit would be used up in less than two years. However the cuts that are being proposed are counted over ten years; long after the borrowed money would be gone. So the idea that there is a $1 cut for every $1 increase in the debt limit is routine Washington DC smoke and mirrors. It is more like a 20¢ cut for every $1 borrowed. And if history is an indicator those future cuts will never be made.

Meantime, the President plans to collect checks of $35,800 per couple for his birthday bash on August 3rd. The same day he threatens to cut off senior’s social security checks.

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