Hitting the Debt Ceiling

There is a huge political debate going on about the national debt and the debt ceiling. You can’t open a Web page, newspaper or magazine without reading the concerns of government officials and everyday Americans. Most pundits believe the debt ceiling debate will be resolved before the government defaults. But that’s not guaranteed. And even if Congress does manage to kick the can down the road a bit, we’re all concerned about how exactly they’ll do so, and we’re concerned about the next steps the government will take to get the national debt under control. 

We’ll give you some background here on the national debt, debt ceiling and the political debate. And, we want to remind you that even in the face of crisis, you can protect yourself and profit.

What Is the National Debt?

Here in the U.S., the Treasury Department is allowed to borrow money to keep the government functioning. They do this by selling Treasury bills, notes, bonds, and savings bonds to individuals, corporations, state or local governments and foreign governments. The national debt is the amount the United States government owes the buyers for these Treasury instruments.

The national debt as of this week is more than $14 trillion. 

What’s the Debt Ceiling?

The debt ceiling is the maximum amount of money the government is allowed, by law, to borrow to meet payment obligations on all types of government programs such as Social Security, Medicare, tax refunds, foreign aid, civil servant and military salaries.

Before 1917, Congress had to approve borrowing each time there was a budget shortfall. The law establishing a debt ceiling in the U.S. was passed in 1917 to give the federal government the flexibility to borrow within a set limit based on that particular year’s budget. World War I funding was the major impetus for this change.   

Then, in 1974, under the Congressional Budget Act, Congress was authorized to set a debt ceiling to keep the government operating within financial bounds whenever the budget was not balanced. Congress has raised the debt-ceiling several times over the last decade to allow the government to borrow more money to cover payment obligations.

The debt ceiling is currently set at $14.294 trillion. And, once that ceiling is reached, the government cannot legally continue to spend unless the debt ceiling limit is extended by Congress. 

What’s All the Excitement About?

Since it’s up to Congress, there is a huge political brouhaha in Washington. You’ve heard in years past that the government needs to increase revenues, rein in spending and balance the budget. And depending on whom you speak with, the path and the timeframe to accomplish that differ greatly. But the debate is much more urgent today because of the sheer size of our debt load.    

The threat of not raising the ceiling and not showing progress toward a balanced budget means U.S. creditors may lose confidence in the U.S.’s ability and willingness to pay. If we hit the ceiling, government payments could actually stop! That has never happened. In the past, the debt limit has always been increased. That’s not to say the path to get there has been smooth. But the U.S. Treasury has never failed to pay on its obligations as a result of reaching the debt ceiling. 

Because the current global economy is unstable, even the unlikely possibility that the U.S. could default is a destabilizing factor worldwide. The markets have been and will continue to react until a resolution is reached. 

Current Hubbub in Washington

Both the Republican and Democratic parties recognize the danger zone. And they know it would be beyond irresponsible to allow America to default. Yet they are not above using the circumstances to further their political agendas. And with the national debt so large in relation to gross domestic product, the political debate is heated. It’s about cutting government-funded programs — some of which are popular social safety nets — and about the other major political hot button, increasing taxes. 

So you can imagine the fireworks. People say they’re all for cutting programs … until those cuts actually affect them. They say it’s okay to increase taxes … as long as it’s not their taxes that are increasing. And each political party has its own constituent interests to push forward and protect.

The Obama administration has asked Congress to raise the limit, warning that failure to act could lead to a government default and drive investors into a tizzy well before that. 

On the other side, House Speaker John Boehner (R., Ohio) told the Economic Club of New York that any increases in the government debt limit should only be approved if deeper cuts are made to spending. 

His remarks came after Senator Charles Schumer (D., New York), accused Mr. Boehner of “playing with fire” by using the debt limit to force spending cuts and budget restrictions. Mr. Schumer also said he believed the debt limit increase should be approved by mid-summer to reassure nervous financial markets.

Is There Another Way?

In the past, it has been suggested that the debt ceiling be replaced with debt targets for lawmakers to work within. This type of approach would eliminate the imminent threat and drop-dead date approach of the debt ceiling. But most of the possible methods for benchmarking a debt target would give the U.S. Treasury more influence over financial policies. So there is concern in some camps about that approach.

Alternatively, some believe it would be helpful to revert back to the method used before the 1974 Congressional Budget Act and raise the debt level simultaneously with the budget. This would eliminate the threat of government shutdown, keep the budget in lawmakers’ purview and focus discussion on each year’s budget decisions. 

Undoubtedly there is more debate about this subject to come.

Where Are We Now?

Earlier in the year Treasury officials pointed to May 16 as the day the U.S. would hit the debt ceiling. Since then they have found ways to delay some payments, pushing the ultimate deadline to early August. 

But, the federal budget deficit continues to increase with the U.S. government spending more than it collects. And the government continues to borrow more through the sale of Treasuries.
We are relatively sure a political compromise will be reached before the deadline.  And we are also sure there will continue to be more debate, posturing and negotiating in Washington until that happens … and well beyond. 

We suggest you stay tuned … 

But regardless of whether a last-minute deal is reached to avert a default, the long-term crisis won’t be solved unless America’s lawmakers come up with a REAL plan to bring our debt down. And I just don’t think they have the political willpower to do so.