Last month, January 19 to be precise, the US reached a debt ceiling of $31.381 trillion. The debt ceiling is the limit on the amount of money the federal government is allowed to borrow to meet its obligations. If the US is unable to meet its obligations (that’s, it defaults on its debt payments), the likely impact will be spikes in bond yields, higher borrowing costs, plummeting consumer confidence, and financial market turmoil and contagion. This may sound traumatic, and it’s, but Congress has raised or suspended the debt limit 79 times since 1960.
Voters and investors alike should realize by now that the debt limit is a political tool used in regular negotiations in addition to a tool for running a government. Republicans are adamant that they won’t sign off on a debt ceiling increase without spending cuts, while President Biden is unwilling to conform to any ties for fear of an economic shock. With Republicans holding a really slim majority in the House of Representatives, and a few Republicans saying they wouldn’t vote for a debt increase at all, it will likely take a Democrat vote to pass a rise. Since 2011, Republicans have largely opposed raising the debt ceiling, while Senate Democrats have overwhelmingly supported them.
What Does Hit the Ceiling Mean?
Reaching the debt limit doesn’t automatically trigger a US debt default because the Treasury can still use funds from the Treasury General Account (TGA) or apply “extraordinary measures” to continue to meet its obligations. Here’s the feasibility of using either of these options. On January 19, the Treasury Department’s General Account stood at $456 billion. If these aren’t used up, or exhausted, the “extraordinary steps” under consideration include: redeeming investments in the Civil Service Retirement and Disability Fund (CSRDF) and Postal Service Retired Health Benefits Fund (PSRHBF) waiving $8.4 billion, suspending investment reinvestment of the Government Securities Investment Fund (G Fund)–$294 billion, suspended reinvestment of the Exchange Stabilization Fund (ESF)–$17 billion, and suspended sale of Treasury and Local Government securities–$143 billion. In total, TGA balances and extraordinary actions could provide more than $950 billion in support.
Even with these extraordinary measures, the Congressional Budget Office expects funds to run out by the summer of 2023. “We project that, if the debt limit remains unchanged, the government’s ability to borrow using extraordinary measures will be exhausted between July and September. 2023,” said CBO director Phillip Swagel earlier this month.
Facts to Worry About, or Not to Worry About
- The closest the US has come to defaulting on its debts was in 2011, where a last-minute deal averted such a disaster. However, this led to the only credit rating downgrade of US debt in history.
- The US debt-to-GDP (Gross Domestic Product) averaged 65.20% from 1940-2022. In 2022, the ratio stands at 129%, the highest in US history. (Trade Economy- US Gross Federal Debt to GDP).
- Net interest payments on US debt cost almost $400 billion yearly (Office of Management and Budget).
- Japan has the second largest debt, $13.05 trillion, but its debt-to-GDP ratio is by far the highest – 259%.
- China has the world’s second-largest economy, but its debt is just over $10 trillion, representing only 68% of its GDP. (World Population Overview- National Debt by Country).
If politicians fail to reach a deal and do cross the debt abyss, the Federal Reserve will serve as the first line of defense. After barely closing in on 2011, the Fed laid out a game plan whereby the central bank would buy up defaulting Treasuries, primarily paying off bondholders. Transcript of the FOMC meeting in August 2011, specifying that, “so long as the default reflects political impasse and not the United States’ underlying inability to meet its obligations.” This Plan B is reassuring, so long as “political stalemate” never becomes an inability to stay afloat.
Bryan M. Kuderna is a Certified Financial Planner™ and founder Kuderna Finance Team, a financial services company based in New Jersey. He is the host of The Kuderna Podcast. his new book,“WHAT SHOULD I DO WITH MY MONEY?: Economic Insights for Building Wealth Amid Chaos” available wherever books are sold.
