GOOGLE ADS
miércoles, mayo 22, 2024

Everything You Look For On a Website

HomeFinanceWhat Is The Debt Ceiling, And What Can I Do About It?...

What Is The Debt Ceiling, And What Can I Do About It? (Part 1)

[ad_1]

US government borrowing is approaching the $31.4 trillion debt ceiling Congress authorized in December 2021. Congress has been unable to agree on raising the debt ceiling. The House of Representatives has approved an increase coupled with specific spending reductions, but the Senate has not.

I have written extensively about the debt, the deficit, and inflation.

There is considerable public discussion of the US government debt ceiling, and the potential serious consequences if the Congress does not agree to increase it.

  • The Congressional disagreement about the debt ceiling is a political debate with potentially significant economic consequences.
  • The Treasury has several tools that allow it to postpone a default once it “runs out of money”.
  • These tools do not support indefinite delay. Eventually, the Treasury really will have no more money to spend without additional borrowing.

At that point, the Treasury will be unable to pay all of the government’s obligations, including:

  • Beneficiary payments – most notably Social Security
  • Vendor payments, including Medicare and Medicaid
  • Interest and principal payments on Treasury debt obligations including bills, notes and bonds

The Treasury has said that it is unable to prioritize any payments, although there is some indication that it uses separate systems for debt payments and other types of payments. If this is true, the Treasury might prioritize Treasury security principal and interest payments, potentially limiting the financial system fallout.

The Treasury failing to pay any obligations on time would have a major impact on both the financial system and the broader economy.

  • Investors would lose faith in the US government’s willingness to pay its obligations consistently.
  • Some citizens and companies would not have the money they expected to support their spending.
  • Collectively, these effects could lead to recession and a (further) rise in interest rates.

It is unlikely that Congress would refuse to raise the debt ceiling for very long if the Treasury had to stop payments. The pressure from constituents would be enormous.

What can you do?

  • Hold extra cash and insured bank deposits to minimize the personal impact of delayed Social Security or other payments.
  • Maintain your diversified investment portfolio – attempting to “time” any stock market reaction is unlikely to succeed.

The history of the debt ceiling

The U.S. Constitution (Article 1, Section 8), authorizes Congress to raise funds “to pay the Debts and provide for the common Defence (sic) and general Welfare of the United States.” Congress can do so either by levying taxes or borrowing Money (capitalization in the original).

The debt ceiling represents the current state of an evolving relationship between the Congress, which taxes, borrows, and spends, and the Treasury, which manages the borrowing. In effect, the Congress decides how much borrowing to do, and the Treasury decides how to borrow – which bonds to issue, with which maturities and characteristics.

According to a history of the debt limit published by the Congressional Research Service, until the First World War, Congress authorized specific bond issues in detail, including total amounts and maturities of the bonds. During and after the war, Congress ceded more authority to the Secretary of the Treasury regarding maturities and the composition of the debt. During the 1920s, Congress allowed the Treasury to issue notes (a type of bond), limiting the amount of notes outstanding, but giving the Treasury even more flexibility.

In 1935, the Congress created two debt limits, one for short-term bonds and one for those with longer maturities. 1939 marked the beginning of the debt ceiling or limit as we know it, with one limit for debt of virtually all kinds and maturities. While the current political controversy over the debt ceiling may appear to be a new development, Congress refused the Eisenhower administration’s request to increase the debt limit in 1957, seeking more efficiency in managing the military budget.

Politics and the debt ceiling

Congress decides how to obtain resources and what to spend them on. The two decisions are linked. You can spend only what you have. Requiring Congress to be clear about both enables citizens to evaluate their legislators – assessing whether the services the government provides are worth the resources the citizenry must surrender to receive them.

Fundamentally, there are three ways to raise resources: fees, taxes, and borrowing. Fees and taxes are unpopular with whoever must pay them. Borrowing is politically less fraught – the taxes and fees needed to repay the debt will be imposed and paid in the future. Nevertheless, opponents of the borrowing and the spending it supports can attempt to make the connection more direct and immediate. This is an essential aspect of the political debate.

The political parties have different views on both spending and funding decisions, reflecting the differing attitudes and preferences of their respective supporters. The argument about raising the debt ceiling concerns the methods and amount of the spending. For example, you may recall that in 2011, the Congress agreed to increase the debt ceiling only after also agreeing to reductions in both military and discretionary government spending.

To heighten the stakes, the debt represents an essential asset for many. US citizens, the US and global banking systems, and many countries around the world, hold Treasury bills, bonds, notes, and bond mutual funds. Problems with the US national debt have global economic implications.

Nevertheless, the argument about the debt ceiling is fundamentally a political argument with governance overtones. If the US Congress and government more broadly don’t want political disputes about the debt ceiling to create economic difficulties, they can change the process for raising resources. For example, they could require that each piece of legislation authorizing increased expenditure be bundled with either an increase in the debt limit or a change in taxes or fees sufficient to provide the resources required.

[The next post will provide more detail on how a debt ceiling breach might play out, and what you can do to prepare.]

The foregoing content reflects Rick Miller’s opinions and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.

GOOGLE ADS

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

[ad_2]

READ  Wagner Group Fighters Linked to Massacre of 500 in African Village: UN
GOOGLE ADS
RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular

Recent Comments