The Deal with the Debt: Administration Accuses Congress of 'Playing with Fire'

Some lawmakers, like Sen. Tom Coburn (R-Okla.), dismiss the warnings, insisting that the stated consequences of raising the debt ceiling are overblown.

“I would dispel the rumor that is going around that you hear on every newscast that if we don’t raise the debt ceiling, we will default on our debt – we won’t,” Coburn said on CBS This Morning. “We’ll continue to pay our interest, we’ll continue to redeem bonds and we’ll issue new bonds to replace those. So it’s not entirely accurate.”

Lew informed Congress that the Treasury has employed “extraordinary measures” to keep the wolf away from the door but those efforts have been exhausted. By Oct. 17, the U.S. Treasury is expected to be left with only $30 billion – a sum far short of net expenditures on certain days, which can reach as high as $60 billion. Without sufficient cash on hand, it will prove impossible for the U.S. to pay its creditors.

Raising the debt limit, the Obama administration says, is a duty that rests solely with Congress under Article I, section 8 of the U.S. Constitution, which grants the House and Senate the sole power to borrow money. Historically, until 1917, Congress authorized each individual debt issuance separately. That practice ended with the onset of WWI when, under the Second Liberty Bond Act of 1917, it allowed the government to borrow money as needed up to an aggregate amount now known as the debt ceiling.

In 1979, the House of Representatives adopted a rule that automatically raises the debt ceiling when a budget is approved without the need for a separate vote on the debt ceiling. The House can waive or repeal the rule. In this instance, in the absence of a spending bill, a vote is required to raise the limit.

“Extending borrowing authority does not increase government spending -- it simply allows the Treasury to pay for expenditures Congress has already approved,” Lew said.

The public debt represents the value of all outstanding securities issued by the Treasury and other federal agencies to fund the government. The debt rises as a result of government spending and ebbs as a result of tax revenues and other receipts.

Federal debt as a share of the nation’s gross domestic product has historically increased as a result of wars and recessions when spending is forced upwards and falls after the crisis subsides. In 1945, for example, with the close of WWII, the debt held by the public as a share of GDP hit 113 percent but fell steadily over the following 30 years. In more recent decades the federal government has broken with that tradition and borrowed more heavily to fund various programs.

The job of managing the federal debt falls to the Bureau of the Public Debt within the Treasury Department. It divides the IOUs into two primary categories – intergovernmental holdings, which reached about $4.8 trillion as of April 2, and debt held by the public, about $12 trillion.

The intergovernmental debt is held by about 230 federal agencies. The Social Security Trust Fund takes the revenue it collects from the FICA tax and purchases U.S. Treasury Bonds to accrue interest on revenues before the money is distributed to beneficiaries. As of April 2, the Social Security Trust Fund and the Federal Disability Insurance Trust Fund held $2.7 trillion in U.S. debt. Other agencies follow suit. The Office of Personnel Management – in order to help fund employee retirement, life insurance, health insurance and other benefits – holds about $1.12 trillion in securities.

But most of the nation’s debt is held by the public in one form or the other. Of that $12 trillion in public debt, about 44 percent is held by foreign governments who have counted on the U.S. to pay off.

China is the largest investor, holding U.S. securities valued at about $1.3 trillion according to the most recent count. Japan holds $1.108 trillion of the nation’s debt while Caribbean banking centers are third with $291 billion.

The Federal Reserve, which in recent years has upped its purchases of government notes to keep the economy afloat, holds IOUs valued at about $1.66 trillion. State and local governments have purchased securities valued at $709.1 billion.