Capital Corner:  "Trillion $ Game of Chicken"

Jim Brandenburg, CPA, MST, Shareholder - Tax   email | bio
June 2011

 The stage is being set in Washington for a dramatic political battle. Both sides are digging in and neither one is showing signs of budging.   The issue at hand and the focus of the struggle is the federal debt limit. 

On a regular basis the federal government borrows money in the financial markets to operate various government programs. There are limits to this borrowing and Congress must approve increases in the federal debt limit. Without this congressional authorization, the government is restricted in its ability to borrow.   Currently the federal debt ceiling is $14 trillion and current trends indicate this ceiling will be reached sometime this summer (early August is the expected deadline).   The separate but related issue of controlling the growing federal budget is also being debated. 

The president and treasury secretary along with leaders on both parties of Congress, have discussed raising the debt limit but have made little progress thus far.  This is where the battle lines are being drawn. On one side, President Obama and his administration are seeking to increase the debt limit. They argue that the debt limit has been increased many times in the past. Not increasing it now would be reckless, as the markets would experience unprecedented instability and uncertainty. They support efforts to control the federal budget deficit only if they do not interfere with raising the federal debt limit and risking default on U.S. obligations.           

On the other side, republicans would like to obtain firm commitments for cutting government spending in return for increasing the debt ceiling. They believe that the deficit is growing too large and something significant needs to be done.  This debt ceiling issue may be an opportunity to do that.    

Both sides seem to agree that the debt ceiling should be raised, but they differ as to what else is agreed to (if anything) as part of this increase. They both seem committed in their positions, as the financial markets sit on the sidelines and wait. Who will blink first? It's too early to tell, but it will be high drama this summer in Washington.