Treasury Secretary Timothy F. Geithner said that even if he uses ‘extraordinary measures’ to prevent the United States from defaulting on its obligations, lawmakers will need to raise the legal limit on government borrowing by July 8. (Washington Post)

The question one might be ready to ask is whether Geithner’s proposal of raising the debt ceiling is a valid means to prevent default. Consider for example an individual who has a lot of debt. Let’s say he earns $50,000/yr. and has around $50,000 in debt (money that he owes other people in one form or another). He has limited the amount of debt, doubtless, in order to ensure his ability to pay it back. If he earns $50,000/yr., it would seem, paying back the debt would take more than a year, and likely several years. He has to pay for food, shelter, clothing, etc., and so cannot possibly think to direct all his $50,000 to paying off the debt. The more he consumes in a given year, the less he is able to pay off the debt.

And this is the tricky thing with debt–the more you have of it, the harder it is to keep current on payments. It acts like a form of consumption because it almost always incurs interest charges (money paid to the lenders for lending the money). If a $50,000 loan, for instance, comes with it 4% interest charges, one will owe some $2,000 in interest every year. If he doesn’t pay off the loan over the course of the year, he will owe $52,000 the next year, $54,080 the next, and so on. (A fancy tool for calculating this can be found at BankRate.com. For a fun game, try putting in the U.S. federal debt of around $14,000,000,000,000 and see what kind of results you get.)

Geithner’s suggestion is to raise the amount of debt the borrower can take in. But that only allows the borrower to get further in the hole, and end up owing more every year. If the borrower can’t pay off the debt as it stands, what is to say that he will be able to do so when the debt is more than his income?

It would seem that this would only add to the problem in order to solve it. Indeed, Geithner’s strategy would best be offered in attempt to go into default and not to avoid it.