Topic Tuesday #62 2013/09/24 - "Sequester or Default because of the "Debt Ceiling"? Wait, what does that mean?"

What have we gotten ourselves into?

What is a "Sequester"? What is a Debt Ceiling and why does it need to be raised or we will default?

So as you can see from the dictionary definition, it involves withholding assets (or money) until such time as a criteria has been met for it to be released. The criteria here was spelled out in legalese in the Budget Control Act of 2011. In brief, it raised the debt ceiling and sought to apply pressure on Congress to come up with a longer term plan for deficit reduction.

From a Huffpo article: The $1.2 trillion in budget cuts would be spread over nine years and are equally divided between domestic and defense-related spending. During the remainder of the 2013 fiscal year, $85 billion worth of cuts are set to go into effect. The budget cuts would end in 2021.  [Summarized from their article] The Sequester was to answer a Republican demand after raising the Debt Ceiling (more on that in a moment). The Congress Joint Select Committee on Deficit Reduction ultimately proved unable to reach an agreement. This ended  up forcing the sequester to go though and shut down government (because Congress couldn't agree to a 1.2 trillion reduced budget the allotted time).

The sequester stipulated certain areas of government spending will see no cuts. No money will be drawn from spending on wars and military personnel. Funding allocated for Medicaid, Social Security, Pell grants, veterans' benefits and some low-income programs will not be affected, either.

The POTUS says this about the "Sequester":

“The whole design of these arbitrary cuts was to make them so unattractive and unappealing that Democrats and Republicans would actually get together and find a good compromise of sensible cuts as well as closing tax loopholes and so forth. And so this was all designed to say we can't do these bad cuts; let’s do something smarter. That was the whole point of this so-called sequestration." —President Obama

That was the Sequester... what about the debt ceiling? 

In a line; " A legislative restriction on the amount of national debt that can be issued by the Treasury."
Here's where it gets complicated.
Just because there is a limit of the debt that can be issued (in the form of bonds typically) it doesn't actually stop spending, it just stops the treasury from paying on the debt. It halts the liquidity that goes out in interest payments on the debt to the other nations of the world who have purchased the debt. There are consequences to not paying your debts. You lose points on your credit rating (the measure of being a safe investment that judges how much interest you are charged on the credit extended to you. If you are a risk, you pay more. Like buying a car or house.). The US Credit rating was downgraded in 2011, causing drops in the stock market and raising interest rates, the last time we had this mess. We had to raise the debt ceiling to avoid defaulting. Currently the "Debt Ceiling" is $16.699 trillion and will be exhausted and need to be raised again in October 2013.

What happens if we default because we can't pay on the debt by borrowing more?

In 2011, House Republicans threatened to shut down the government and breach the debt ceiling unless the Obama administration made substantial concessions. The two sides ultimately came to an agreement. There was no shutdown. There was no default. But we did have our rating reduced making borrowing money more expensive.
From "The Debt Limit: History and Recent Increases"

"The Government Accountability Office has also concluded that delays in debt limit increases could lead to “serious negative consequences for the Treasury market and increase borrowing costs.” A delay in interest payments on Treasury securities would trigger a default and risk serious negative repercussions for economies and financial markets around the world. Default might be avoided in such situations by delaying other types of federal payments and transfers. A government that delays payment of an obligation, in effect, borrows from vendors, contractors, beneficiaries, state and local governments, or employees who are not paid on time. In some cases, delaying payments incurs interest penalties under some statutes such as the Prompt Payment Act, which directs the government to pay interest penalties to contractors if it does not pay them by the required payment date, and the Internal Revenue Code, which requires the government to pay interest penalties if tax refunds are delayed beyond a certain date."

Drawn conclusions?

Now if I can expound upon the former: The stability of other countries finances are interwoven with the United States due to their reliance on held American and America paying dutifully on the interest. Should America stop paying foreign held debt, then those reliant nations will have hardships paying their own debts. The amount of impact will vary and is largely unpredictable, but if we take it to the next logical progression, we can expect drops in global markets and economic downturns that could spiral to collapse because America missed some payments - or stops paying entirely and writes it all off, bankrupting other countries. This could lead to conflict; war is a fantastic economic stimulus.
That's the geopolitical landscape, locally here at home, we have another fine mess.
And that will be for next week.