Debt ceiling is like a credit card? Think again

I'm not a big fan of 'dine and dash' analogy that President Obama used to explain our debt ceiling situation. But I'm even less of a fan of the credit card analogy used by Euro Pacific Capital's Peter Schiff, which I received in the mail this morning.

In his press conference [Monday], President Obama said the Republican reluctance to raise the debt limit was the equivalent of a diner who had ordered and enjoyed a meal who then decides to leave the restaurant without paying. (Given how often this metaphor has been used by Democrats, it appears to be the sanctioned talking point).

But what he is really saying is that since this particular diner has no cash on hand, it would be much more responsible for him to use a credit card than to dine and dash. In taking this moral high ground the President ignores the fact that the diner (who has indebted himself through habitual restaurant meals) intends to pay his credit card bill with another card, and then repeat the process until he runs out of cards. So in the end, it's not the restaurateur who gets stiffed, but the issuer of the last card the diner is able to acquire.

If anything, the dashing diner isn't just one indebted person, it's a couple: a Republican and a Democrat in a somewhat troubled relationship. That said, the president is right, in that if the Congress fails to raise the debt ceiling, we simply won't be able to pay some of our bills, or service our debt.

But investor Peter Schiff is wrong to say it'll be because our credit card has reached its limit. Unlike  a Visa or American Express card, the U.S. Government-issued plastic (let's call it the CongressCard) has no limit. There's no card provider out there saying, "You can only borrow so much..." Quite the reverse, in fact: the card provider - all those people buying Treasury bonds - have an apparently insatiable appetite for our debt. That's right, they want to lend us more. It's a bit like those notices you get in the mail from your card company, except these notices say: There's no limit on your card! Keep borrowing at these low, low rates! As much as you like!

In other words, the CongressCard's credit limit -- also known as the debt ceiling -- is self-imposed. We can, if we choose to, raise that limit any time we want. We don't have to sign up for another card and pay off the old one with the new one, because the current card is good, and for now the sky is the limit. We only have one card, and we only need one card.

That's not to say, of course, that we should keep hammering that card in the way we have been. That's what the debt ceiling is for, to impose a little self discipline on our feuding couple. And let's not forget that the reason our fractious red/blue couple is dining in this expensive restaurant in the first place is because they chose to go there. Together. It may have been a stupid decision, but it's too late to argue about it when the bill arrives. They should have settled the fight before they left the house. And maybe agreed to go somewhere else for dinner. Or maybe cook at home.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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To bad the Treasury and US government doesn't have its own personal credit rep[air agency like the rest of us with a Lexington Law or something.

You completely missed the point of my analogy. The president says we need to pay for our meal. That would require tax increases or spending cuts. The president does not want to pay for the meal. He wants to borrow money so that we do not have to pay for our meal. That is why he wants to raise the debt ceiling.

I agree the debt ceiling is a self-imposed limit that we can raise whenever we want. However, we cannot force our creditors to keep lending. Eventual we will hit a lending ceiling when our creditors, finally realizing how broke we are, refuse to extend us any more credit. At which point we will be have three options. 1. Finally pay for all of those charged meals with drastic tax increases and spending cuts. 2. Default on our debts and stiff our creditors. 3 print money and stiff our creditors by “repaying” them with worthless dollars.

Thanks for replying, Peter - I'm honored!

I don't think I did miss your point, however. You say that "The President says we need to pay for our meal." Well, it's not just the president, is it?  it's the restaurateur, or our creditors and service providers that say we need to pay.

You say paying for the meal would require tax increases or spending cuts. But that's simply not the case. We can pay our bill by borrowing. In fact we can pay all of our bills by borrowing. I'm not saying we should: I'm saying we can. And cheaply, too. In other words, being able to borrow is not the issue. Getting ourselves into a position where we stop borrowing is the issue.  Budgeting, in other words, which is where tax increases and spending cuts come in. If the Congress could actually budget properly, our diner wouldn't even go to the restaurant in the first place, not without knowing that he could pay cash for the bill when it arrived.

As for forcing our creditors to keep lending - who's forcing them? The majority of America's creditors are ... Americans. But the other nations who borrow from us are increasing their purchases of Treasuries. And interest rates are at record lows. I see no compulsion here.

But I do agree that we are in danger of hitting a real debt ceiling, when our creditors balk at shoveling cash at us - which they inevitably will one day. If only Congress could get its act together to exercise even the most basic fiscal discipline to forestall that. Maybe the prospect of not getting paid will effect a nudge in the right direction.


So, essentially, you completely agree with Peter Schiff. Your CongressCard has a limit, it is called the debt ceiling.
Additionally, there is no CongressCard, as you point out "the card provider - all those people buying Treasury bonds - have an apparently insatiable appetite for our debt." i.e. there are multiple debt providers, which makes your CongressCard (1 card) argument moot. Which, in turn, obligates you to agree with Peter Schiff's analogy.. i.e. multiple debt providers.

 Sorry, Johnjohnson123, I think you're missing my point. As it stands, there is NO LIMIT  to what the government can borrow, except that which the congress ITSELF imposes. I lumped all of the lenders together for convenience in issuing the CongressCard, but it makes little difference how many lenders there are out there, because none of them are putting a limit on our borrowing. Therefore, there's no need to refinance.  A subtle distinction .. but there you are.

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