For Immediate Release
Jan. 06, 2006
Contact: Kate Incontrera, 410 230 2109 or kincontrera@dailyreckoning.com

U.S. Government on the Brink of Bankruptcy
Lawmakers Face a Difficult Choice — Go Deeper in Debt or Default on Loans

BALTIMORE, MD – The U.S. government is about to reach the $8.18 trillion borrowing limit it set for itself by law. If Congress does not enact a new borrowing limit soon, the government could default on its financial obligations as early at March. But a new borrowing limit just means the government will go deeper in debt.

The U.S. Treasury Department has already warned Congress of the danger. In a Dec. 28, 2005, letter, Treasury Secretary John Snow states, “the statutory debt limit, currently $8.184 trillion, will be reached in mid-February 2006… [U]nless the debt limit is raised or the Treasury Department takes authorized extraordinary actions, we will be unable to continue to finance government operations.”

The last time the United States faced this situation was in the fall of 2004, when the federal government met its $7.4 trillion debt ceiling. That time, the Washington Post reports, Treasury Secretary John W. Snow was forced “to delay contributing to one of the federal employees' pension systems.” 

Addison Wiggin, Editorial Director of The Daily Reckoning and co-author of the bestselling book, Empire of Debt, says the government is in a no-win situation. And the biggest losers will be the American people.

“We’re already over $8 trillion in the hole,” he says. “That won’t just disappear. But Congress doesn’t seem to care. They’ll be gone before this massive bill comes due.”

In Empire of Debt, he and co-author Bill Bonner explain that only the government could get away with such a scheme. “A father would not have dinner in a fine restaurant and send the bill to his son,” they write. “Nor would he say to the restaurateur: Hold the bill for my unborn grandson.”

But the situation is even worse, Wiggin says. “We’re rapidly approaching a time when the United States will have so much debt, its creditors will get nervous. They’ll stop buying Treasuries, and instead will demand their money back. If that happens, Congress will need a way to generate cash — quick.”

At least two U.S. Congressmen agree.

After raising the debt limit in 2004, Rep. Ron Paul of Texas wrote, “Increasing the national debt sends a signal to investors that the government is not serious about reining in spending. This increases the risks that investors will be reluctant to buy government debt instruments. The effects on the American economy could be devastating.”

Sen. Russell Feingold also agrees that more debt is not the answer. In a letter to The Daily Reckoning, he warns, “we are facing budget deficits for years to come, and it is crucial that we prioritize spending what little federal dollars we have.” Unless something is done, “we will continue to see unlimited spending, unlimited taxes cuts and more debt for our children to pay off.”

If Congress does decide to increase the debt limit again, it will be the fourth such move during President Bush’s presidency. In addition to 2004, the debt ceiling was raised in 2003 and 2002. As Paul says, the United States has amassed “$1 trillion of new debt in just one year.  By contrast, the entire federal debt was only $1 trillion when President Reagan took office in 1981.”

“The Bush administration promises to cut spending, yet it is still borrowing out of control,” says Addison. But he doesn’t place the blame entirely on the White House.

“With the exception of Ron Paul and Russell Feingold, most politicians have remained quiet on this. That tells me that Congress will just roll over and pass a higher debt limit, without considering the consequences.”

In the long run, Wiggin says, “our children might be better off if America accepted bankruptcy now.”

For more from Addison Wiggin and Bill Bonner, see http://www.dailyreckoning.com.

Agora Financial also publishes The Daily Reckoning, a daily, free e-letter that weaves information about the financial world, investing and everyday life into an educational and entertaining format that has been engaging their readers for over six years.

Empire of Debt 
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