What Is The Debt Ceiling

What Is The Debt Ceiling And Why Does It Keep Coming Up?

The debt ceiling is like the nation's credit card.

To run with the analogy, it’s like the kids having a credit card, but little idea of what credit is or how it works. They just know that every so often the credit card company sends a notice stating that they’ve almost maxed out the card and will have to stop spending if something doesn’t change. So what do they do?
They ask mom and dad to get the credit limit increased of course😎 .

Mom and dad argue about why the kids are spending so much. Mom says they can use it to pay for a the laptop and some sports equipment, which they need, but after that, they need to live on their allowance. This means they’ll need to cut their spending and use their allowance to pay down the credit card bill. YIKES!!

Dad says the kids deserve what other kids have - of course they need the basics, but they also need nicer school clothes, a few pair of shoes, and an iPhone. And some headphones. After all, they are good kids and they deserve it. He argues the kids young and can always pay down their debt later. For now it’s important they have what they deserve. 🤯.

Mom says dad is the one being irresponsible. Dad says mom is mean.

But here’s the rub. The kids have mom and dad’s credit card. Mom and dad do the majority of the spending, and they’ve always done the majority of the spending. They don’t understand budgets and credit any more than the kids. It’s hard to tell the kids no. It’s hard to buy a smaller house, and drive a used car. So instead of making those tough choices, mom and dad whip out the credit card.

In the end, mom and dad have always increased the limit on the credit card, avoiding divorce and bankruptcy by mere minutes.

In real life, the kids are the American people. Mom and dad are congress. Congress spends the money. The Treasury Department, who pays the Federal Governments bills, is the credit card company. No analogy is perfect, but it'll do.

Every year the Federal Government runs a deficit, meaning, they spend more than they make. About how much more do they spend than they make each year?

Well I’m glad you asked.
About $1.4 trillion more. Uh huh. Trillion. With a T.

$1,400,000,000,000.00. 👈 That much more.
The nation’s budget is $4.8 trillion in 2023. $1.4 trillion is about 30% of $4.8 trillion, meaning currently we spend about 30% more than we make. Every year.
That $1.4 TRILLION overage is the amount we put on the nation’s “credit card” every year. And it goes up every year.

That number is estimated to increase to $2 trillion annually by 2028, but who’s counting. More on that in a minute.

But....there’s a problem. Well, obviously. But there’s another problem. Actually there are several problems.

These problems are why this particular debt ceiling debate is a bit more concerning than the 23 other debt ceiling debates that have happened since 1997.

Problem #1 - We’ve already hit the debt ceiling.

Note the date on that article; January 19, 2023. You can read the article here.

The Treasury Department is already taking what it calls “extraordinary measures” to pay the government’s bills while congress points fingers at each other and takes exactly zero accountability for their actions.

“Extraordinary measures” are nothing more than not paying some bills in order to pay other bills. In this case, the Treasury is not paying money into the 'Civil Service Retirement and Disability Fund’ or the ‘Postal Service Retiree Health Benefits Fund’🙄 .

As one can imagine, these “extraordinary measures” only buy so much time. At some point the Treasury will have to stop paying other bills, and the gravity of the problem increases. This brings us to problem #2.

Problem #2 - The funds could run out more quickly than previously estimates projected 👀 .

On April 10, 2023 the Congressional Budget Office (CBO) released their report on the first 6 months of the fiscal year. Turns out the annual deficit is already at $1.1 trillion. That means, at this pace, our deficit won’t be $1.4 trillion, but $2.2 trillion. “I thought that wasn’t supposed to happen until 2028” you say! I know!

The report says this year’s deficit increase due to higher than expected expenditures coupled with lower tax receipts.

That is a 50% increase in the deficit and could easily push the debt ceiling debate back to center stage much more quickly than congress expected.

Yes, there are more problems...like:

✅ Congress is more divided ideologically than ever and demonstrates minimal capacity to work together.

✅ Our economy is still struggling to recover from the pandemic keeping financial tensions and concerns high.

✅ There is a growing chorus of voices outside the US actively seeking ways to transact apart from the dollar.

Those can wait for another day.

The primary reason this conversation matters at all is, we could exhaust the “extraordinary measures” more quickly than Congress anticipates. If Congress is too focused on political gamesmanship they could easily put the country at real risk of default.

What’s Likely to Happen?

This is the 23rd time in the past 25 years we’ve hit the debt ceiling (see chart below).

Increasingly congress has used this issue as a political lever against the other party to extract some concessions, pushing the deadline into the final hours in order to maximize leverage and exposure.

And yet they have always increased it. I don’t expect anything different this time. However, the concern that the deadline could be closer than they realize and could lead to unintended consequences is a real possibility. The economy is enormous, and

we shouldn’t assume they know how long they can wait to act, or if what they do will work. Based on their rhetoric it seems far more likely that they lack even the most basic understanding of financial and economical principles...they don’t even care when the bills are due. And therein lies the real concern.

The Bottom Line

Congress is playing a dangerous game that is of little to no benefit to the American people. Rather than trying to score political points, Congress must find ways to work together to address a serious issue that could legitimately damage the United States ‘credit score’ on the global stage. The most likely scenario is that they will find a resolution in the final hours, but there is a real concern that this time the grace period on their overdue payment could come sooner than they can write the check.