July 28th, 2011
11:42 PM ET

Fareed's Take: The damage is already done!

By Fareed Zakaria, CNN

I know you have all heard so much about the debt ceiling that you're probably exhausted. But I think it's important to point out a few facts because this matter has been so clouded by rhetoric.

Did you know that there is only one other country in the world that even has a debt ceiling?  That's Denmark, a strange anomaly, and its debt ceiling is deliberately kept very high so that it will never need to be raised.

Why does no one else have a debt ceiling?

Because when a legislature votes to authorize spending at a certain level but authorizes tax revenues at a lower level, it is assumed that the government will have to borrow the difference.

The vote to have higher expenditures than tax revenues is - in effect - a vote to borrow money to cover the difference.

And in the United States, Congress - including Republicans - voted for a budget in which expenditures exceeded tax revenues.

The logical consequence of that budget - again, passed by Republicans and Democrats, is that the government has to make up the difference by borrowing.

To come at it now after the budget has been passed is like getting your Visa bill and calling up the company to say, "Actually we don't want to buy all that stuff we bought."

Read: Will I get my social security check?

That's not how it works. First you pay the bill, then you can change your spending habits.

So why do we have a debt ceiling?

Ironically, it was put in place during World War I so that Congress didn't have to authorize every new issue of debt. It was assumed that it would be a formality to raise it. Since 1960, the debt ceiling has been raised 78 times.

My basic point is that this is a crisis that we have manufactured out of whole cloth. We have created a circumstance in which the world doubts our credibility, rating agencies are thinking of downgrading our debt and the dollar's role as the world's reserve currency could be jeopardized.

Please understand that none of these things are happening because the United States is running deficits. There was no indication - by any metric - that the United States was having difficulty borrowing money one month ago. In fact, the world has been lending money to the United States more cheaply than ever before.

iReport: Send your message about the debt debate to Congress.

We face downgrades and investor panic not because of our deficits but because we are behaving like deadbeats, refusing to pay our bills, pouting while the bill collector waits at the door.

We do have a large deficit and debt and we do need to get it under control. That the Tea Party has raised awareness about this is admirable. And I agree with their view that the current set of entitlements - Medicare especially - have to be reformed dramatically to get our fiscal house in order. But that is not an excuse to endanger the good standing of the United States.

First you pay the bills and then you figure out how to change your spending habits.

The tragedy here is that the damage may already have been done.

From now on, every time the debt ceiling needs to be raised, the world will wonder: Will the U.S. stand by its promises or will it break them?

Read: Political elders tell us what to do to resolve the crisis.

Something that was taken for granted - the credibility of the United States - is now surrounded by uncertainty. In her interview with me to be aired this Sunday at 10am ET/PT on GPS, IMF Managing Director Christine Lagarde says that "Global markets have always had a positive bias towards the United States but that is now eroded somewhat."

For this erosion, we have only ourselves to blame.

Tune in this coming Sunday at 10am ET/PT to watch more from Fareed on the debt ceiling and to listen to his full interview with Christine Lagarde. In the meanwhile, follow Fareed on Twitter and Facebook, and bookmark the Global Public Square.


soundoff (1,448 Responses)
  1. Peter Warren

    What silly arguments! The result of no debt ceiling is, every wonderful western economy is an out of control, spending spree mess and this rubbish idea of a government can spend whatever it wants, borrow whatever it does not have the support to raise in taxes produces Greece, heaving knows how many States who are essentially bankrupt and every so-called economy in debt up to its ears. Not satisfied with engineering an international melt-down in 2008, oh-so-wonderful (aren't we the best?) USA now wants to melt down the reserve currency by borrowing it to worthlessness – and you think a debt ceiling is a stupid idea? Without it, there would not even be the derisory level of cuts that the legislatures are thinking of passing.

    August 1, 2011 at 4:30 am | Reply
  2. rose macaskie

    Fareed Zakaria. This is not a fight about the debt ceiling this is a fight about the rich not wanting to pay taxes. The rich have been so unwilling to do anything for the poor or to prevent poverty, bettering schooling for example, that Obama has had to play at pushing things to a limit which will make everyone sit up and take notice and maybe start to counteract the actions of the rich as I am trying to do now, it is hard for Obama to get the rich and make them pay their fair share when there is no support for his efforts, no support means things like the rise of the teaparty for example that makes it so hard for him to get a agreement with the republicans, there aren’t enough people around to explain to them why they are wrong you need a lot of people argueign the right cases if the wrong ones are not to win a democracy is about the people ruling.
    The rich under pressure from Obama have not stepped back from their mean brink, push as he would and worthy as his cause was, they have stuck to their selfish desire not to have to pay a price for the crisis that they brought about by paying more taxes, a desire not to pay that they have somehow backed up with worthy sounding arguments like, we must pay back our debt without killing the chicken that lays the golden egg, they are the chicken that lays the golden egg that in fact they don’t lay, on the contrary they would take health care and schooling and such from the poor but the argument sounds plausible. Their most recent and very deadly move has been choosing this moment to get Moody’s to threaten to downgrade America and the liberal press has such a lack of talons that they have taken Moody’s moves seriously, as if Moody’s were such a respectable organ that they have to take this body seriously don’t seem to supect them as they should of just playing games to favor themselves and their rich beneficiaries.
    Moody's is not trustworthy it upgraded some very bad debt to please Goldman Sacks just before the fall of the banks, it would be quite capable of talking of downgrading America to put more pressure on Obama, just to stop the rich having to pay more taxes or just to do for the for some humiliating fact of having a black man as head of the country. When it upgraded to good debt, the worth of some bad debt, said that bad debt was good, a bit before the crisis, it sounds as if they did not even study the debt they were grading, so lazy and careless were they that did not even look to discover into the extent of the damage they might be causing by doing what Goldman Sacks asked, they just did what Goldman Sacks asked, so they are unprincipled, and downright murderous, it is with them anything to earn more money or not to pay more taxes.
    As far as i can see even left wing journalists have got so worried about their own savings that they just want the debt ceiling raised even if with a deal that does for everything they stand for.

    About how Moody’s cheated according to Michael Lewis in the book the big short. I should think if you read other books of that moment they would corroborate and extend how wicked the financiers are and how bold they have become in their bad behavior.
    A few financiers before the crash realized that a lot of the mortgages they were selling where rotten and decided to insure them so they could earn money from the crash, covering the insurance money when the debtors went broke. This insuring bonds or debt, is called “credit default swaps” which name for insurance makes it hard for people to understand what was going on.
    Mortgages used to be a benefit to banks, people paid them interest on money they had borrowed so it is profitable to lend people money which is why the banks do it and it is useful to the public too, it helps people to start big projects useful while the banks are reasonable cautious about the credit worthiness of clients making it less likely that people go broke. As banks lend to an awful lot of people the occasional bankruptcy was not going to break the bank while for individuals, the public, earning money by lending it seemed a bit risky, till it occurred, very recently, to someone to bundle a lot of debt mortgages and loans up into big bundles of, safe debt and medium safe debt and pretty risky debt, all together, so that the risk of the whole bundle was very low, and sell shares in this safe bundle to the general public. A share in debt is not called a share but a bond and these were called mortgage bonds.
    The public liked buying debt so much that soon there was a big demand for this debt, this had an unexpected result as things often do, it meant that some financiers were running round trying to persuade people to take out mortgages whether they could pay for them or not so as to have debt for the other financiers to sell to the public so as to be able to fulfill the demand, all the financiers getting a cut on all debt they sold. They were convincing the general public to acquire a debt as high as the financiers could gully them into buying when normally financiers are cautious about loaning money. They were selling debt to people who probably could not afford to pay them back. How could a public used to having a hard time getting a loan, learn to distrust the financiers evaluation of what they could afford. Such was the demand for debt the financiers were eager to acquire as much as possible whether this debt broke their clients or not.
    This debt, bought on another level of the financial world to sell to the public, was brought by financiers who did not understand how bad it was because they could not be bothered to read each paper and realize how little liquidity the debtors had.
    In the end there were some financiers who did read the individual mortgage papers and realized that the people who had taken out many of the loans they were buying and selling were going to default be unable to pay the interest would go broke trying to pay it, the minute the teaser price on their loans stopped being present. The teaser price was the especially low interest the borrowers had to pay for the first two years, put there to help convince them to take out debts they could not afford.
    The rich have been so against paying anything that this sort of brinkmanship that we have seen in this debt ceiling crisis has been necessary to stop the rich or try to stop them getting away with blue murder.
    The main religious groups seem to be with the rich because a old fashioned situation with lots of teeming poor suits them. The religious are at rock bottom very classist cover it as they may? Also a situation in which they are the clever educated ones among a lot of cap doffing clowns is so ego satisfying and also they have a lot of money and care what the markets do more than they care for the poor. Even if that money is to help the poor their short time goals with the poor blind them to the long term effects on the poor of what they do to them is the most generous opinion I an have about their conduct my real opinion is they favor poverty unconsciously or consciously as poverty favors them. They are with the rich persuading their followers, rich and poor, that the right is right, so the poor will vote for the right. How could they pretend to be so nice to the poor and back up the rich this is one of the most sickening bits of the whole business?
    The best way to counteract all this is to move on the ground we chose and that should be giving lots of publicity to how cut throats the financiers are and having them licking their wounds and giving explanations and a bit scared about how disagreeable all the hate that they are accruing is going to be, instead of them continuing to turn the world upside down. We did not go for their throats when they broke the world for the first time and so it is our fault if now they are causing havoc again. Is it not probably special interests that are capable of whipping up all this ho ha of the tea-partiers and such.
    Have you talked to a racist recently, I talked to one two days ago, lots of people seem to feel so sorry for those in the humiliating position of having a black man as a leader that they quite understand any sort of vile deed to get rid of him, though it ruin a country many countries, what we are seeing here is a plunge into the most envious jealous and hierarchal depths of mans soul. Things like the power of what people feel is their birth right and how hard they will fight to preserve it or how they feel that if they have worked hard enough to get to bishop or rich man say they have a right require a situation that gives them all the respect the old fashioned way of doing things would have afforded them, at any rate they should not have the law laid down to them by a black man or have to do anything to reduce the agreeable possibility of having groveling masses waiting for a bit of largesse to be thrown from a carriage. rose macaskie.

    August 1, 2011 at 9:43 am | Reply
  3. Kevin

    Fareed,

    For someone who is so smart I can't believe you missed the point in your article "The damage is already done!" Yes it is true that Denmark is the only other country in the world who even has a debt ceiling, which is purposefully set high so it doesn't have to be raised, but the point of voting on a debt ceiling increases is not solely based on the numbers; it's also based on the psychology of it too! When we vote to raise the debt ceiling the question should not be "if we raise the debt ceiling" but rather "when we raise the debt ceiling let's review what we've spent and see if we should spend more/less in the future." To use your analogy of a credit card, when we get the credit card bill you're right we shouldn't question the amount we should pay (because we've already borrowed and spent the money) but we should take a second look at what we've spent, our income coming in and question if we should spend more in the future. If we have an automatic increase to the debt ceiling, or worse no ceiling at all, than the congressional leaders, and the public as well, will not be forced to look at our spending on a broad scale and make the hard choices we were forced to make this time.

    The debt ceiling argument went from "let's have a clean increase, no questions asked" to "Ok let's have some cuts in spending but also have tax reform (aka revenue increases)" to it's final version "let's increase the debt ceiling, with spending cuts and no tax increases". (which by the way, decreases the governments share of the GDP not increases it as tax increases would) The reason why we have the cuts in spending we have is because of the debt ceiling vote and the choices we were forced to make to raise it.

    No one here is saying that the vote to raise the debt ceiling is easy, or from a purely economics, numbers standpoint useful (because we'll vote to increase in anyway). But what I am saying is it is a necessary step to force congress and the public on a broad scale to look at our spending and have a conversation on this basic question: "Should we change our spending habits?" And without a debt ceiling vote it is inevitable that this hard question would never be asked, more less answered.

    -Kevin
    (for an actual conversation e-mail me at: sanbogsilent@gmail.com)

    August 1, 2011 at 11:48 am | Reply
  4. Lobo Mal

    As G. Bush started & was "successful" in the "War on Terror"; why B. O. does not think of starting the "War on American Poverty"?

    August 1, 2011 at 1:06 pm | Reply
  5. Don M.

    Those of us who are really concerned about the deficit have beeen played by the best for over 50 years. We know a scam when we see it. The Tea party is trying to do the same thing. If they were serious about the deficit they would agree to some revenue increases with large spending cuts, which would cut the deficit the most. But their unwillingness to agree to any revenue increases means they have a different agenda cloaked in lowering the deficit.. Cut the size of government and cut taxes no matter what it does to the deficit. Within a couple of years they will be exposed and yet again another opportunity to deal with the deficit will be lost. Us independants are sick of this.

    August 1, 2011 at 2:48 pm | Reply
  6. Paul

    Perhaps only two countries in the world have a debt ceiling. Which are the top debtor nations? What is the debt to GDP ratio? What is the debt to population ratio?

    The USA often prides itself on doing more and bigger than any other country. My fear is that they have exceeded all, or most, other countries in the area of debt.

    August 1, 2011 at 5:58 pm | Reply
  7. BX999

    It seems the whole nation decided to ignore the truth. The U.S. had no economic or job problems until the wise republicans under Bush squandered resources and revenue by the disastrous tax cut. After that they turned around to squander American lives in Iraq, and borrowed money to finance it. No wonder the nation has reached the edge to financial precipice.

    That was not enough! There came a president who wanted to avert financial ruin. He saved banks and big financial corporations from bankruptcy. He saved the republican investors' money. Then comes the republican dog biting the stimulus hand that fed it. Low and middle income democrates had nothing to gain from it; they have no shares in City Bank, AIG, etc.

    It is also forgotten that during the first Bush administration the rich used the money to ship jobs abroad from tax savings That was not job creation!

    Boehner said there is a spending problem. Yes, it is true. May be revenue creation could mitigate it. Suspending the salary of republican officials could be a good start. As far as other people are concerned, check their voting records. If they voted for officials who want to diminish funds for health care, education, infrastructure at the expense of the middle class, pay them a visit. They are uniformed.

    August 2, 2011 at 12:59 am | Reply
  8. Ron

    It seems the, only thing we've ever learned from history, is we've never learned from history. I appreciate Mr. Zacharia's water; I've been in the desert for years dieing from poor budget decisions. Will the Tea Party be pleased to see our borrowing status destabilized to get their 15 minutes of fame. The tea in the water changed nothing; change the laws. We could not easily accomplish that from British America to England in the 1700's, but can here, today. Save the tea rebel responsibly.

    August 2, 2011 at 8:10 am | Reply
  9. J

    Thank you Tea Party and those who elected them. We could have had a deal with twice the amount of debt reduction that Boehner would have backed if not for the liberatarian party's gun to his back. Instead, we have this 2 part mini reduction that will do next to nothing in the long run.

    You elected the tea party to reduce spending but not to ruin the country to accomplish it. If you hire someone to get your cat off the roof would you mind if he burned your house down to get the job done?

    August 3, 2011 at 4:06 pm | Reply
  10. spiritspotblogger

    Lots of lessons learned from the debt debate. http://suzettessoapbox.wordpre​ss.com/

    August 3, 2011 at 6:37 pm | Reply
  11. Todd

    Fareed, you said: "For this erosion we have only ourselves to blame."

    Wrong. We have only the Teabaggers in Congress to blame. They were the only people refusing to raise the debt ceiling, and they were the only people in the process absolutely refusing to compromise in any way. The fact that they held the full faith and credit of the United States hostage for political gain is beyond disgusting. It is treasonous.

    August 3, 2011 at 11:41 pm | Reply
  12. Ken Pruitt

    What a liberal idiot you are, and how dare you call one party
    of the debt ceiling debate unAmerican when that party passed
    legislation that could have been voted on, amended, reconciled,
    etc. if the liberal Senate had even deemed to CONSIDER it!

    You stupid liberal asses, like those in the Congress, WILL blow
    up America, as you are not only unAmerican, but traitors!

    Fortunately, most people recognize you, and CNN for entertaining
    you, for what you are. Why don't you take this narcissistic socialist/Marxist
    president and take him back where you came from, since you're so
    infatuated with him and willing to see America self-destruct and "terrorize"
    the public with your liberal rants!?

    August 4, 2011 at 5:42 pm | Reply
  13. Milkman

    Tea Party supporters may be misguided, but isn't it that the right of every american?. Their actions to oppose raising the debt ceiling were reflected their principles and were exercised lawfully within the rules of US government. What about those Republicans who know what they should be supporting, but didn't in order to preserve their political careers and party unity. And, please, let's stop with the "anybody who disagrees with me is a traitor" talk. The US system of checks and balances promotes conflict and division of opinion. That means it's up to individuals to tone down the rhetoric if you want to keep some civility in your political culture.

    August 5, 2011 at 1:04 am | Reply
  14. Britt Lowie

    Please understand that none of these things are happening because the United States is running deficits. There was no indication – by any metric – that the United States was having difficulty borrowing money one month ago. In fact, the world has been lending money to the United States more cheaply than ever before.

    We face downgrades and investor panic not because of our deficits but because we are behaving like deadbeats, refusing to pay our bills, pouting while the bill collector waits at the door.

    Absolute total nonsense.

    The high and mighty Zakaria conveniently forgot the downgrade warning Standard & Poor's published on April 18 of this year:

    * We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
    * The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
    * Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
    * We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

    August 5, 2011 at 1:38 pm | Reply
  15. Mike

    Now that the US debt rating is offcially downgraded, a 2 week political gong show by US politicians (law-makers!?) and an utterly spineless, clueless President – witnessed by the world – the time has arrived for American voters and taxpayers to say Enough is Enough – and DEMAND the complete de-toxification of the US political system. Shut down the Senate & Congress, all Senators & members of Congress get fired by the will of the People for shameful incompetence and their salaries re-routed to those folks who truly EARN their wages – police, law-enforcement, EMS, FAA staff, the Armed Forces and essential Government services. And then appoint a bi-partisan and unbiased czar of Spending Cuts & Deficit Reduction, to start the recovery. Run the country like a business!

    August 6, 2011 at 12:07 am | Reply
  16. allahdad

    47% of the adults in this country pay no income tax, Fareed, and the overwhelming majority of them receive some type of welfare, paid for by the hard-working middle class and the wealthy. About 95% of the 47% who pay no income tax are Democrats. Democrats are, for the most part, parasites. And they are ungrateful parasites. They live off the good will of others, and when they think those others aren't giving them enough, they use their attack dogs, the Democratic Party, to attack them and steal their money. It's really disgusting when you think about it. A whole freeloading class of people called Democrats demanding to be cared for.

    August 6, 2011 at 9:15 pm | Reply
  17. eric in portland

    Great article. Now that we HAVE seen our credit rating drop and our stocks plummet as Farewell predicted, let's all thank every republican we know, and call the congressional ones we don't know and thank them, too.

    August 7, 2011 at 2:00 pm | Reply
  18. Paul Ballard

    HI Fareed, As you said, US military budget is massively in excess of what is needed now.

    But why shouldn't cuts be far greater than you propose ? In 2000, military budget was only $294 billion compared to projected $770 billion in 2012.

    Sun Tzu in "The Art of War" says : a strong economy makes a strong national defense, not vice versa. All successful wars won by country with stronger economy. So running down our economy – as we're doing now – will weaken US national defense not strengthen it.

    For all the hype and aggressive partisanship, it's telling that the US Federal Budget follows a similar pattern in terms of spending priorities over the past 20 years. So, if Republicans and Democrats end up doing virtually the same thing, wouldn't they be better off – and the country too – if they worked together ?

    Since 2000, national defense, veterans affairs, health, medicare and interest on the debt have combined accounted for 65-70% of the total Federal budget outlays. Meanwhile, science, transportation and education have been a mere 10% of that – or 6-7%!! If these numbers were reversed, in two decades we would be a far stronger country. So let's get started now!

    Please keep up the good fight. It's clear our politicians do not focus on such matters. If we citizens do not keep forcefully reminding them, things will never change.

    August 7, 2011 at 7:54 pm | Reply
  19. David Doney

    We have a short-term problem, which is the Bush tax cuts and the doubling of defense spending since 9/11. The long-term problem is primarily healthcare and growth/employment.

    President Obama, if re-elected, can ensure the Bush tax cuts expire in 2012 by merely vetoing any attempt to extend them. We can reduce defense roughly in half spending over a decade as we end the wars and reduce the baseline defense budget back to 3% GDP, where it was under Clinton in 2001, when we last balanced the budget.

    Ex-bubbles and stimulus, our economy has only grown 1% for a decade. The bubble hid reality, which is that free trade with low wage countries is resulting in virtually no growth in jobs. From 2000-2010, we created 2 million net jobs, versus 15-20 million in each of the three decades prior.

    Tax and spend decisions are important, but the big one is how we stop the exodus of jobs. With Apple employing 25,000 U.S. workers and 250,000 overseas, U.S. innovation isn't going to help us.

    We have to charging countries with much lower wage levels a tariff to balance the playing field, as we should with currency manipulation.

    August 7, 2011 at 8:06 pm | Reply
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    August 9, 2011 at 7:57 am | Reply
  21. Charles

    Mr. Zakaria, Why did you specifically mention Medicare but not the Pentagon (and their corporate suppliers) and the wealthy Wall Street banks. These are the true financial black holes in our budget. Look at the numbers in total and on a per capita basis within the industry and civilian populations in each group. The American people are becoming more aware that these inequities are by design.

    August 9, 2011 at 5:05 pm | Reply
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