WASHINGTON D.C. – As Congress debates whether to raise the national debt ceiling to avoid defaulting on U.S. debt, China says it may already be too late.
According to a Fox News report, Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., said the weakened dollar has already contributed to the U.S. going into default.
“In our opinion, the United States has already been defaulting,” Guan was quoted as saying, according to the AFP.
In recent polls, Americans are saying they do not support raising the debt ceiling. Americans want government to cut spending instead.
Economists and politicians argue that if the debt limit is not raised, the U.S. will default on its loans.
Senator Mike Lee (R-Utah) said that’s not exactly the case.
“Some people have insisted that a failure to raise the debt limit would result immediately and inevitably in what they call a ‘default.’ I think that’s over simplifying. I think that’s exaggerating the problem,” Lee said. “A default, as I see it, occurs or would occur if Congress refused to raise the debt limit and then the Secretary of the Treasury were to refuse to make the regular payments on interest on the federal debt. That, of course, isn’t going to happen.”
Lee said if the debt ceiling were raised, the Treasury Department would have authority to continue borrowing more money to fund operations.
“The risk accompanying that, is that if Congress raises the debt limit yet again without putting any kind of structural spending restraint in place, something that will change the way Congress spends money and make sure this won’t happen every few months indefinitely, at some point that’s going to start affecting interest rates,” he said.
According to Lee, every time the Federal Government borrows money, it will cost more. Interest rates will jump, and so will the loan payments.
“If interest rates were to jump up by three interest rate points, three percentage points, immediately we would go from spending about 250 billion a year on interest payments, to about 700 billion a year on interest,” he said. “That’s a lot of money. That’s about what we spend on social security in a year; about what we spend on Medicare and Medicaid combined in an entire year; about what we spend on national defense in an entire year. There is some risk in just raising the debt limit…”
Senator Orrin Hatch (R-Utah) said this is the third time Congress has been asked to raise the debt limit under Obama. It was raised seven times under President George W. Bush in eight years.
“Obviously the government’s spending is out of control,” Hatch said. “Utahns want the government to cut spending, not raise the debt limit so Washington can continue its irresponsible spending spree. And I could not agree more with their assessment.”
Lee said either way, Americans “will perhaps feel some real world impact from this decision.”
“If we don’t raise the debt limit, at that point the Treasury Department will be unable to continue borrowing to fund the basic expenses of the Federal Government,” he said. “Right now we’re bringing in about 2.2 trillion dollars a year in tax and other federal revenue. We’re spending at a rate in excess of 3.7 trillion a year.”
Lee said the government would have to spend at a rate of 40 percent less than it is currently.
“The difficulty lies in the fact that there is a fair amount of ambiguity in where the cuts need to be made,” Lee said. “The President, acting through the Secretary of Treasury, would have a certain amount of discretion to decide which programs would get cut and by which amount in order to cover the debt limit-induced shortfall that would result from a failure of Congress to raise the debt limit.”
But if the debt ceiling is raised and spending continues at its current rate, or if the debt ceiling is not raised, the money to pay the additional interest rates will have to come from somewhere. Most likely from other federal programs that Americans have relied on.
It will also affect the private sector, Lee said. Mortgage rates and car loan interest rates would soar.
Hatch said the current spending habits has put the Nation in a crisis.
“Our Nation is on the verge of a real fiscal crisis,” he said. “The government continues to borrow money to fuel its spending habits. The result is that spending is now at historic highs, amounting to 25.3 percent of our GDP in the latest fiscal year. Meanwhile, our debt now stands at a staggering $14 trillion and is trending toward 100 percent of our GDP. That is why I cannot support increasing the debt limit, not without deep cuts in spending. We must make the fundamental changes to our spending programs that might be tough today, but that will make maintenance of budget discipline easier in the future. Unfortunately, I see no indication that this President and his liberal allies in Congress are willing to do that.”
Lee said he expects that Congress won’t vote on the debt ceiling until the last minute – the first week of August.
“If recent experience is any guide, we can confidently say that it is most likely to go right up to what has been identified by Secretary Geithner as the limit, which is during the first week of August,” Lee said. “I think that is unwise. I think we should vote on it much sooner than that.”
According to Lee, waiting till the last minute means they could have a proposal come forward and they will be forced to “Take this deal or leave it.” That could leave the government underfunded for a few days, or a few weeks. It also means Congress cannot have a debate and discussion on the proposal, and the public won’t have time to weigh in.
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