Obama administration will ask to raise debt ceiling $2 trillion – What would China do?

What’s the value of having a ceiling if you routinely raise the limit? At a personal economic level, I can understand providing a higher “credit limit”  if one’s financial picture showed an increase in income and a responsible credit history, but how can the owners of the national debt simply increase the limit with stagnant GDP and a questionable credit history?

Yesterday, Treasury Secretary Timothy Geithner suggested we’d need a 14 percent increase in the nation’s credit limit – another $2 trillion – by the first week in August or, well, who knows what will happen.

The Treasury has told lawmakers a roughly $2 trillion rise in the legal limit on federal debt would be needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said.

OK. What the heck does the 2012 presidential election have to do with anything? Oh, that’s right, we certainly would not want to “bump up” against the arbitrary limit again during the campaign season. That might raise some flags with TEA Party people and kick them into action again … wouldn’t want that would we?

[W]hen lawmakers asked how much of an increase would be needed to meet the government’s obligations into early 2013 [just after the election], Treasury officials floated the $2 trillion working figure, Senate and administration sources told Reuters.

Why even have a limit if Congress – who has significant control of the nation’s purse strings – can increase it at will after advice from Treasury? Why not just make the debt limit $100 trillion … that should at cover us for maybe two or three more election cycles.

Our buddy Andrew McCarthy over at The Corner reminds us there is no plan in place to even start to slow the growth rate of the debt let alone stabilize it at a specific percentage of GDP. None. No plan. Zero.

So, what will China do? I really don’t know, but if you take a look at suggestions from construction and energy corporate leaders in China and the governor of China’s central bank, they are suggesting diversification. They think they may have too much invested in the USA.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

China’s foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.

Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s central bank, who said on Monday that China’s foreign exchange reserves “exceed our reasonable requirement” and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

 

So they have about $3 trillion invested and some of China’s heavyweights want to cut that by two-thirds or $2 trillion. The $2 trillion figure is about what the US Federal Reserve has in Treasury notes on its balance sheet.

From Wikipedia.

The US Federal Reserve held between $700–$800 billion of Treasury notes on its balance sheet even before the recession. In late November 2008, the Fed started buying $600 billion Mortgage-backed securities (MBS). By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted since the economy had started to improve. Holdings started falling naturally as debt matured. In fact, holdings were projected to fall to $1.7 trillion by 2012. However, in August 2010 the Fed decided to renew quantitative easing because the economy wasn’t growing robustly. Its goal was to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2-10 year Treasury notes a month. In November 2010, the Fed announced it would increase quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.

Between 2000 and 2007, the national debt was somewhere between 5.8 percent and 6.9 percent. I’m comparing Government consumption expenditures and gross investment totals to GDP. In 2010, that comparison has jumped to 8.3 percent.

I’m certain there are other ways to measure, but I think in layman’s terms this is kind of like the front-end ratio when buying a house and getting a mortgage. In most instances they approve payments (principal, interest, taxes, insurance) when they less than 30 percent of your gross income.

What would the bank say if you just kept borrowing more money and never seem to reduce the principal owed?

What say you Internet economic gurus? Comments welcome.