Artificial Barrier
The “debt ceiling” is an artificial barrier. It was created by Congress, and it can be altered, expanded, or abolished by Congress. But while it exists, it poses a serious hazard to the American economy.
The concept of the debt ceiling is pretty simple: Congress sets a hard “ceiling” on the amount of debt the United States Government can have. Once the government reaches that limit, it can no longer borrow money to cover expenses. Since the US Government is in debt to the tune of almost $32 trillion, and is running a negative budget this year of $1.3 trillion (CBO), the practical effect of “hitting the ceiling” is the US Government will stop paying its debts. And part of that is payments for the US Government bonds that finances debt. In short, the US Government will default on its loans.
One thing to get very clear, is that the debt ceiling is not a “budgeting” item. Congress operates on a “double entry” system. They pass a law, say to build a dam. Then they pass a second law, to spend the money to build that dam. Twice Congress had the opportunity to NOT spend the money, the actual dam law, and then the dam finance law. So all of the spending that causes the US Government to reach a “debt ceiling” is money already twice agreed to in the US Congress.
Dishwashers
Or to put it in more personal terms, like most Americans, we carry some debt. We have a mortgage on the house, we have a car loan, education loans, and we have a few credit cards with debts on them. Every time we spend money creating a debt, we make a choice. Jenn and I chose to buy a new washing machine (the old one broke). We spent the money to buy it. (We chose not to replace our broken dishwasher – yet. After all, there’s only two of us…)
But what if we said, one day, that we have hit our “debt ceiling”, and we aren’t paying on the loans or the credit cards anymore. After all, we’ve hit a “ceiling”.
For a couple of weeks there’d be silence from the creditors. Then would come the flurry of notices, failures to make payments, threats of debt collection and perhaps even foreclosures. And ultimately, the full force of the law would be used to require us to pay our debts. And meanwhile our credit rating would be trashed, and no one would allow us to borrow money from them, through loans or credit, again. Or, if they did, they’d charge a huge cost, high interest, to protect them from the risk of our defaulting again.
Interstate Highways and Aircraft Carriers
If we didn’t want to hit the ceiling, we shouldn’t have spent the money in the first place. Once we spent the money, and made the commitment to pay it back, anything other than paying it back is reneging on the deal.
What is the practical impact of the US Government “reneging” on its debts? No one is going to send the “world sheriff” to foreclose on the Capitol Building. Unlike our personal debts, they won’t be evicting the military from their bases, aircraft carriers, or repossessing the Interstate Highway system.
What will happen is that folks will no longer buy the US Bonds that finance the trillions of dollars of debt, at least at the interest rate the Treasury Department is offering. So Treasury will have to pay more in interest to sell the bonds, costing us (both the you and me ‘us’, and the United States ‘us’) more money. In the long run, just like personally trying to borrow money after defaulting, the “cost” of that money will be higher because the risk is higher.
That will echo throughout our financial system, as the price to borrow money goes up. Mortgages, car loans, credit card interest rates, home improvement loans, second mortgages and flexible interest rates all will jump.
And, of course, since the Government can’t spend money, they can’t pay workers. We’ve been through Government shutdowns in the past (for other reasons). Millions of workers go without paychecks, and government functions come to a standstill. Those “essential workers” who are required to work, do it with the “faith” that they will be paid in the future, but in the meantime, they can’t pay their personal bills. And things we depend on, from the Internal Revenue Service to the National Parks, close.
The Brink
Congress created the debt ceiling to “make a point”. It put every legislator “on notice” that the debt was going up. It started in 1939, after six years of the New Deal legislation to combat the Great Depression. But it was raised for the Second World War, lowered after the War was over, then raised again for the Korean War. Since 1960, it’s been raised seventy-eight times, forty-nine times under Republican Presidents, and twenty-eight times under Democratic Presidents (US Treasury).
The point obviously wasn’t made. The first debt ceiling law in 1939, placed the maximum at $45 billion.
Both parties used the debt ceiling as a negotiating chip in the past. But neither Party allowed the US to default on its obligations, because of the danger of catastrophic economic consequences. In the end, leadership has avoided, “Cutting off our nose to spite our face”.
But we live in unprecedented times. Our era of political polarization, the tenuous hold the Republicans have on the House of Representatives, and more significantly, the slim margin that Kevin McCarthy holds on the Speakership, brings us much closer to the brink. McCarthy knows: Republican John Boehner lost his Speaker’s seat because he “gave in” on a debt ceiling negotiation with President Obama. McCarthy has an even narrower margin of support than Boehner had.
Sure we’ve got until sometime in June before we fall off the cliff. The “wizards” of the Treasury can manipulate the debts and borrowing to keep us clear for that long. But, come June, we will hit a “hard ceiling”.
We, the American people, are depending on our leadership (on both sides) to find a way to step back from disaster. Hold your breath, it’s going to be a scary “ride”.
