Cnn Money’s Video “debt Ceiling Made Easy

Part 1: The Debt Ceiling

CNN Money’s video “Debt ceiling made easy”, presented by Mr. Velshi, attempts to explain what the debt ceiling is, how it usually works, and what is happening now regarding raising this number. Velshi compares the debt ceiling to the United States credit limit for all of its spending. Raising this limit has been routine over the country’s history and has been left to a vote which, considering that other countries have been known to just outright spend more, seems relatively safe. The process involves issuing bonds for U.S. debt, which is considered one of the safest investments out there, holding a perfect AAA rating. This set of circumstances is different than usual. On May 16th the U.S. hit the credit limit, but the Treasury secretary was able to move money around to delay the issue until August 2nd. After this date, someone in the world holding a U.S. bond would not be paid. Everyone is unsure of what would happen simply because this has never happened before. Republicans tend to argue that they should increase the ceiling but guarantee spending cuts now, to get the issue over with and avoid a credit rating downgrade. Democrats meanwhile will tend to argue that we can’t cut spending much now because consumers and businesses are recovering from a bad recession and that it will lead the economy to turn downwards again.

In addition to this video, CNN Money’s Jeanne Sahadi wrote an article on August 2nd summarizing what the debt ceiling deal will do. The new deal will keep the U.S. out of default and promises to reduce the deficit by at least 2.1 trillion dollars over the next ten years. As of when this article was written, it was unclear whether the deal was enough to avoid a downgrade in the United States credit rating. Now, of course, it is obvious, as S&P downgraded the U.S. to AA+ regardless. More specifically, it raises the debt ceiling by 400 billion now, 500 billion after September and has large cuts at the end of the year increasing a further 1.2-1.5 trillion. Sahadi believes this will be enough to get through 2012. There is a bipartisan joint committee of Congress being put together to figure out the new cut proposal, to be done by Thanksgiving and voted on before Christmas. There are currently spending cuts of 2.1 trillion planned for domestic and defense spending, but much more must be done by the end of 2011. If this committee succeeds and Congress agrees, the debt ceiling will change by that plan, otherwise it will raise 1.2 trillion. Failure by the committee will cause federal budget spending, evenly divided by defense and non-defense spending, will be lowered. Tax reform is not off of the table, but due to its unpopularity is probably unlikely. Additionally, aid for those with a low-income such as those aided by social security, Medicaid, veteran benefits and food stamps will not be affected by the cuts in the immediate future. Sahadi mentions