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Debt doomsday imminent

By Barbara Whelehan ·
Friday, May 20, 2011
Posted: 2 pm ET

By now you've heard that judgment day is at hand. The rapture is scheduled to unfold on Saturday, May 21. And with all the natural disasters and global political unrest we've had lately, it doesn't seem so far-fetched.

In preparation for this event, I have made no retirement planning changes whatsoever. In fact, I expect to awaken Sunday and go about business as usual, which includes going to church and thanking the good Lord for all my blessings.

But I fear a different type of judgment day may be fast approaching.

Failure to raise the debt ceiling

It's not the economic cataclysm that Timothy Geithner warned of in his letter to Sen. Michael Bennet. In there the Treasury Secretary spells out the economic consequences of failing to raise the statutory debt limit. If Congress doesn't act, the U.S. will be forced to default on its legal obligations, which in turn "would inflict catastrophic, far-reaching damage on our nation's economy, significantly reducing growth and increasing unemployment."

In the letter, Geithner paints a grim picture of the future should this default occur, even raising the specter of a return to the panic of the 2008 financial crisis. Ultimately, consumers would have to pay higher rates for mortgages, car loans, student loans and credit cards, and they'd experience "a sharp decline in household wealth." Our 401(k) plans and IRAs would take another hit, and we'd be in for a double-dip recession.

Raiding federal pensions

In the meantime, as of Monday, Geithner began dipping into federal pension funds to tide the country over until Congress gets around to raising the debt limit. He calls it a "debt issuance suspension period," but he will redeem or suspend new investments amounting to $84 billion in the Civil Service Retirement and Disability Fund, and he'll suspend reinvestment of another $130 billion in the Government Securities Investment Fund, a money market fund in the federal employees' defined contribution plan. He must take these actions to "avoid breaching the statutory debt limit." This suspension period began Monday, May 16 and will last until August 2.

Earlier this week I called Kay Bell, Bankrate's Taxes blogger, to ask why Geithner would resort to such an extraordinary measure: dipping into federal pension funds to pay the bills. "It's not the first time this has happened," she said reassuringly. "That doesn't mean you shouldn't feel outraged about it."

She's right. It has happened on five previous occasions -- 1996, 2002, 2003, 2004 and 2006. By law, the federal accounts will be reimbursed once the impasse is over. But these actions are troubling nonetheless. They're akin to borrowing money from your kid's 529 plan to pay the bills until your lenders increase your credit limit. Only much worse because of the scale of the debt.

The judgment day I fear is the one that happens after the debt limit is increased. Will Congress do something to contain and pay down this debt? We're at $14.3 trillion now. How much deeper can we go?

One trillion is a big number. If you could spend $10 million a day, it would take nearly 274 years to spend a trillion dollars at that rate. To spend $14.3 trillion would take about 3,918 years.

The American people are keenly aware of the need for reining in spending, as they're cleaning up their own household finances. And some are even willing to pay more in taxes if it means we can leave our children and grandchildren a financially sound nation in which they can flourish.

Ways to pare down debt

Maybe it's time to put forward some creative ways to whittle down at least some of the debt:

  1. Implement the recommendations made in the Government Accountability Office's recent 345-page report to streamline duplication, overlap and fragmentation of government services. Estimated cost savings: hundreds of billions of dollars.
  2. Create a claw-back provision on bonuses paid since 2009 to the Wall Street executives who were responsible for the magnitude of the 2008 financial crisis and apply that money to the national debt.
  3. Impose a 50 percent tax on the income of lobbyists and public relations firms whose purpose is to influence Congress and distort public opinion, the effect of which is to increase the national debt.
  4. Make corporations pay their fair share of taxes.
  5. Revert to the income tax levels that were in place before former President George W. Bush (under whose administration the debt level increased from $5.7 trillion to $10.6 trillion) took office.

An alternative: We have $9 trillion in our IRAs and defined-contribution plans, according to the Financial Research Corporation. We could donate the money to defray the national debt.

I'm being facetious on that last idea, of course.

You have any ideas?


Follow me on Twitter: BWhelehan

NOTE: An earlier version of this post stated incorrectly that the national debt level increased from $4 trillion to $10 trillion while George W. Bush held office.

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July 14, 2011 at 2:53 pm

AMEN, hcool! You hit the nail dead on! We pit groups against each other by making some pay a large percentage of the bill and others paying NOTHING. Everyone receives services, whether it is paved streets, public education, welfare, police, fire, etc., so everyone should pay even if they make minimum wage. I have no opposition to a graduated tax 10% - 25% with no exemptions. Let's just be fair about this. Corporations included. Simplify the tax code and make a clear unambiguous "You made this, you pay this" tax code.

Combine that with a reduction in the size of government and the various ridiculous programs and we will wipe out the debt in a few years!

July 13, 2011 at 8:25 pm

What is good for General Motors is good for America ! So lets file for bankruptcy and default on our loans. We have the strongest military so who is going to mess with us ?

July 12, 2011 at 1:47 pm

Governments dont spend money in the way we do. the US can never "default" on its legal obligations as all it has to do is change numbers in a spreadsheet and voila, debt paid. It controls the money printer and can print more money whenever. They cannot continue to do this however as too much money in the money supply causes inflation. So taxes must be levied to control the money supply, not to fund any government programs.

When you give your money to the IRS it is destroyed, it is not actually used for anything as the only thing that gives our money "value" the obligation to pay taxes with that money, so we all must trade our labor to get it.

The national debt actually represents our savings. The government checks will never bounce. Government never has or doesnt have dollars. It is just numbers on a spreadsheet.

There is an almost mythological view of money today. Its our religion. We can fix the economy if the people knew what monetary policy was.

A government surplus is actually a bad thing. It means there is not enough money in the money supply. Money is only created when it is "spent" by the government. Government spending is completely different from the kind of spending the rest of us do.

July 12, 2011 at 12:46 pm

The FairTax,

A simple flat tax on NEW Products and on Services which REPLACES ALL other Taxes at about 23-25%.

If you get rid of corporate taxes, this will make companies in the USA more competitive worldwide thus creating and keeping more jobs here, bring more tax money in when consumers have more to spend.

Sometimes the simplest solution is the best one!

July 12, 2011 at 12:45 pm

The FairTax,

A simple flat tax on NEW Products and on Services which REPLACES ALL other Taxes at about 23-25%.

If you get rid of corporate taxes, this will make companies in the USA more competitive worldwide thus creating and keeping more jobs here, bring more tax money in when consumers have more to spend.

Sometimes the simplest solution is the best one!

Ronald J Helwig
July 12, 2011 at 5:33 am

# 1 Repatriate our Money from around the world and in the USA by printing new money and declaring that if you can prove where you obtain your money by legal means it will still be in your Bank account if not it will no longer be valid.( Must be done in 48 hours, no longer than that.) The means to be able to handle this is here and it can be done. All must show where their money has come from.
All old money after that time period is no longer of any value.
#2 A Flat taxes of 10% on all income.
#3 A user tax of 10% on all things purchased.
These two lines in the tax code no exception.

July 11, 2011 at 10:24 pm

Thankfully I don't have any of these things that you think I need like "mortgages, car loans, student loans and credit cards, and they'd experience "a sharp decline in household wealth." not because I'm wealthy, but because I don't chronically spend more than I make.

Uncle Charley
July 11, 2011 at 5:52 pm

Corporations don't pay taxes. It is just included it in the price. So, the customers pay it.

Joop Kaashoek
July 10, 2011 at 7:37 pm

You mentioned some good ideas. I'd include a mandatory system for keeping healthcare costs under control, the same way the rest of the world appears to have affordable health care.

And cut the US military, wars cost more than the results that they supposedly deliver.

July 10, 2011 at 6:40 pm

Everyone should pay federal income taxes! (at least 10%) When almost half of the people in this country pay no federal taxes, then they will always cry out for increased taxes! (they are not paying) Politicians have given these tax breaks to people in return for votes.Politicians are the very reason we are in this financial mess now. Everyone should have some skin in the game. If everyone paid then it would be harder for politicians to raise taxes. (and not pit one group of people against another.