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Debt Ceiling Battle: Why No One Agrees on Anything

The debt ceiling is as much a war over words as it is numbers.

Amid an increasingly acrimonious debate over the debt ceiling, it appears that how each party even explains the way the government spends money depends on what party they belong to and whether that party holds the White House or Congress. (Read More: Why Debt Ceiling Is Far Scarier Than Fiscal Cliff)

In 1993, two researchers at the University of Missouri fingered the importance of party when it came to the issue of debt:


"Party control of Congress and the presidency…is the crucial variable in explaining voting alignments on debt legislation," Linda Kowalcky and Lance LeLoup of the University of Missouri, St. Louis, wrote in a 1993 article.

It is also appears to be the crucial variable in how they define critical financial terms and statutes.

Take the simple issue of default. Republicans contend that only the act of not paying interest on government debt constitutes an act of default. Not paying government vendors or employees, they suggest, is simply a delay, which many companies do.

The GOP takes this stance to preserve the option that the US could in fact not raise the debt ceiling and that the consequences will not be severe. This increases its bargaining power over spending cuts with the White House.

Democrats and the White House take the opposite position. They say it would constitute default for the government not to make any payment. (Read More: Obama: Raise the Debt Ceiling or Else)

Treasury Secretary Tim Geithner argued during the 2011 debt ceiling showdown that bond markets would treat a failure for the government to make good on any payment as equivalent to default on debt. (The ratings agency Fitch argued that such a failure would place the US on a negative outlook, but not result in an automatic downgrade.)

The Congressional Research Service notes in a recent report that "no general statutory definition of the term 'default' exists."

Dennis Flaherty | Photographer's Choice RF | Getty Images

But CRS goes on to quote Black's Law Dictionary defining "default" as "the failure to make a payment when due" and concludes that Black's doesn't make any distinction between types of government debt on the issue of default.

Closely related to the debate over default is the issue of prioritization. Republicans contend that—again, to preserve the option of not raising the debt ceiling—the Treasury can prioritize the use of incoming cash to make interest, Social Security and defense payments.

Treasury contends Congress has provided no authority to prioritize. Treasury is right about that. However, supporters of prioritization say Congress has also not prohibited Treasury from doing it. They are right about that, too. (Read more: Did Obama Just Take Default Off the Table?)

To clear up the confusion, Republican Sen. Pat Toomey plans to introduce legislation giving Treasury the authority to prioritize and make interest, Social Security and defense payments with incoming cash.

What's unclear is whether Treasury payment systems even have the ability to prioritize bills. An administration official says right now, they are designed in a way to pay the bills that come in first. Adding to the concern is that the Pentagon has its own payment system, separate from the Treasury's. They are apparently not coordinated.

There is even controversy over what should be the simplest issue: what is government spending.

The president has asserted that essentially the money has already been spent. That's an attempt to point out the apparent hypocrisy of Congress not allowing the Treasury to issue debt to pay for spending decisions Congress has already made.

Republicans counter—and they are correct—that the president is wrong.The money has not been spent, it has been "appropriated." Appropriation is authority to spend, but not actual spending.

Congress, for example, appropriates money to the Pentagon to buy a tank. But that is not the same as spending the money.That act takes place when the Pentagon engages in an outlay: ordering the tank.

That stance, however, ignores other important legal realities: the executive is generally required to spend money appropriated by Congress. Otherwise, the executive would gather for itself the power of the purse.

The administration does have a limited amount of time (more or less 45 days) to defer or rescind appropriations. But Congress eventually has to approve the executive decision or the administration has to spend the money.

Further complicating the matter (as if It wasn't complex enough already): some argue that it would be illegal for a government agency to engage in spending that would cause the debt ceiling to be breached. If so, government outlays would be limited to the level of cash on hand at the Treasury, subject to day-by-day decisions by the administration.

There could be no clearer sign of the politics of government finance than looking at what happened during the Bush administration.

A senator from Illinois, Barack Obama, declined in 2006 to raise the debt ceiling saying, saying he would not be party to "Washington… shifting the burden of our bad choices today onto the backs of our children and grandchildren."

As president, he has railed against the potential failure of Congress to hike the ceiling.

At the same time, the debt ceiling was raised seven times in the Bush administration, with Republicans controlling the House for six of eight years.

During that time, the debt ceiling was hiked from $5.9 trillion to $11.3 trillion, a 91% increase. Under President Obama, the ceiling has been hiked to $16.4 trillion (and counting) for a 45%—or $5.1 trillion—increase in about half the time under President Bush.

Deep inside its report, the CRS offers what may be the best way to think about the arcana of the US government fiscal process.

The CRS suggests that, ultimately, what matters is what the markets think.

After all, what's at stake is the ability of the US government to finance its debt. So when it comes to the issue of what really constitutes a default, for example, what matters is how it affects the government's ability to finance itself and at what price.

The CRS said in its report: "Aside from technical definitions, financial markets' perceptions of what constitutes a default, or a real threat of default, may be more relevant when assessing the potential impacts of not raising the debt limit."

By CNBC's Steve Liesman; Follow him on Twitter: @steveliesman

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