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Current time:0:00Total duration:9:57

Video transcript

before we talk about the debt ceiling it's important to realize the difference between the deficit the deficit and the debt because these words are thrown around and it's clear that they're related but sometimes people might confuse one for the other the deficit is how much you overspend in a given year while the debt is the total amount the cumulative amount of debt you've you've gotten over many many years so let's take a look I guess a very simplified example let's say you have some type of a country and that country spends in a given year that country spends ten dollars but it's only bringing in six dollars in tax revenue so it's bringing in in taxes it's only bringing in six dollars so this country and this year where it spends ten dollars even though it only has six dollars to spend it has a four dollar it has a four dollar deficit $4 D EF is short for deficit and well let me just write it out and I think it's defense or something it has a four dollar deficit and you might say well how does it how does it spend more money than it brings in how can it how can it actually continue to spend this much where will it get the four dollars from and the answer is it will borrow that four dollars our little country will borrow it and so the debt may be going into this year the country already had some debt maybe it already had $100 of debt and so in this situation it would have to borrow another $4 of debt and so exiting this year it would have a hundred and four dollars of debt it would have a hundred and four dollars of debt if the country runs the same four dollar deficit the year after this then the debt will increase to 108 dollars if it runs another four dollar deficit then the debt will increase to a hundred and twelve dollars now that we have that out of the way let's think about what the debt ceiling is so you can imagine the United States actually does its continuing to run a deficit its continuing to spend more than it brings in and actually for the United States these ratios are appropriate do you not for every dollar that the United States spends right now 40% 40% is borrowed or another way to think about it only it only has 60% of every dollar that it needs to spend right now so it has to go out into the debt markets and borrow 40% to keep spending at its current rate and so if it's continuing to borrow you can imagine that the debt keeps on increasing the debt keeps on increasing so let me draw a little graph here so that access is time this axis right over here is the total cumulative amount of debt that we have we continue to have to borrow 40 percent of every dollar that we're spending and so our debt is continuing to increase so our debt is continuing to increase and Congress has the power or Congress has the authority to essentially limit how much debt we have so right now we have a current debt limit of fourteen point three trillion dollars so this is fourteen point three trillion dollars and I even though Congress has this authority the way that it's worked in the past is it's kind of just a rubber stamp Congress has just always allowed the debt ceiling to go up and up and up to fund our borrowing costs and if you think about it that kind of makes sense because right now Congress is the one that decides where to spend the money what are the obligations and so the debt ceiling is like oK we've already agreed what you have to spend your money on Congress has to determine Congress is the one that figures out what we spend our money on and what our taxes are and so they say look we've already determined how much you have to borrow it would seem kind of ridiculous for us after we've determined how much you borrow to say that you cannot borrow it you can act you cannot actually do what we've told you to do and so historically Congress has just kind of gone with the flow they said okay yeah we've told you you need to borrow more money to to execute on you know it's the executive branch has to run the government for you to actually run the government based on the budget we told you so they just keep upping it and the last time the debt ceiling was raised was actually very recently February 12 2010 it was raised from twelve point three trillion it was raised from twelve point actually twelve point four trillion to the fourteen point three trillion and this happens pretty regularly it's happened ten times since 2001 seventy four times since 1962 so it's just a regular operating thing and right now we the Obama administration says look we've actually come up against our debt ceiling we want to raise it and ideally for the Obama administration they want to raise it by about two point four trillion so they want to raise it to sixteen point seven trillion which will kind of put it off the table for a little bit put it past the elections so that we don't have to debate this any more the Republicans on the other side want to essentially use this and this is a little bit unusual to use this as leverage to essentially reduce the deficit and not only to reduce the deficit but in particular to reduce the deficit through spending cuts and so that's why it's become this big game of chicken and why we're going up against this limit now one thing that that you may or may not realize is that we actually already hit the debt limit the current debt limit and we hit that debt limit on may may 16th 2011 I'm making this video at the end of July in 2011 and the only reason why the country is continuing to operate and the only reason why the country has continued has been able to continue to pay interest on its obligations and pay issue Social Security checks and support Medicare and and and buy fuel for aircraft carriers and all the rest is that Geithner who's the Treasury secretary has been able to find cash and other places cash normally set aside for employee pensions and all the rest and has essentially done a little bit of a bookkeeping taking money from one place to another but what he said what he's publicly said is that he'll be able he won't be able to do that anymore as of August 8th August 2nd 2011 so this right here is the date that everyone is paying attention to August 2nd 2011 according to Geithner at that point he won't be able to find random pockets of cash here and there and shuffled around and you know what he calls extraordinary measures and at that point the United States will not be able to fulfill all of its obligations and so if you think about all of the obligations of the United States this is a huge oversimplification here so this bar is represents all of the obligations some of those obligations are things like things like well it's interest on the that at our do is at our do is a huge amount of debt fourteen point three trillion dollars things like Social Security Medicare Medicare defense defense and then all of the other stuff that the companies the the country that the country has to has to support all of their other obligations so if as of August 2nd 2011 we cannot issue any more debt and Geithner can't doesn't have any extra cash laying around with these extraordinary measures then the the only option if those are the only options on the table the only option is to somehow reduce some of these things by 40% because 40% of every dollar we used to spend on all of these obligations 40% are borrowed and so something over here is going to give we're not going to fulfill our obligations to one or more of these things all of these things that we are legally obligated to fulfill that Congress has says these are the things that the United States should be spending its money on and so at that point it is perceived that we would have to default and a default actually would be on any of its obligations but in particular we could be we especially if we have to cut everything by 40% and we don't want to see retirees you know not be able to you know get evicted from their houses or aircraft carriers not have fuel or whatever else we might defer or have try to restructure or do something weird with our debt in which case we would be defaulting and I want to be clear a default it's usually referred to not fully paying the interest on debt that you owe but it would be a default would be any of its obligations the United States has this triple-a rating if the United States says it's gonna give you a Social Security check you trust that if the United States says that it's gonna it's gonna pay for that Medicare payment you trust that if it if it says it's going to give you an interest payment you trust that all of a sudden if the United States does not fulfill any of those obligations then all of the obligations become suspect and the reason why this is a big deal is you can imagine if if you borrow money and you've always been good at paying back that money you're going to have you're gonna pay lower interest than other people would have to pay but all of a sudden for whatever reason one day you default you either delay your payments or you say you don't have the cash to pay your payments then people's like wow you're a much riskier risk you're a much riskier person to lend money to so now I'm going to increase the interest rates on you and so the perception is is that the United States were to default on its debt or any of its obligations that interest rates that interest rates would go up and the reason why this would really kind of not be great is because it would make the debt and the deficit even worse then we would then this chunk is going to have to grow our obligations are on debt as as new debt gets issued we're gonna have to pay more and more interest so it's gonna just make matters worse it's gonna make the deficit worse and on top of that it's not just that the government's debt the interest on the government's debt will go up but government but interest on all debt in the United States will probably go up because government debt is perceived to be the safest it's the benchmark a lot of other debt contracts are actually tied to government debt so you'll have interest rates throughout the economy go up which is exactly what you do not want to happen when you are either in a recession or when you are recovering from a recession