The Debt Ceiling

You may have heard that on January 19, 2023, the U.S. Reached the debt ceiling. What does that mean?

Short history lesson: before 1917, congress had to specifically issue each bond1 used to fund the government. In 1917, the U.S. Needed to finance its participation in world war I, so they passed legislation that allowed the Treasury Department to issue bonds of different maturity terms and interest rates without Congress having to manage the details of each issue. They could have simply passed legislation authorizing the treasury department to pay the debts Congress already incurred, but instead they put a caveat on the Treasury’s fiscal authority. The final legislation said Congress would not chime in on each individual issue, but simply say: treasury you can issue debt instruments (bonds) up to this level. And so the debt ceiling, was born.

In short, this level has been raised 78 times since 1960 — 29 times during Democratic administrations and 49 times by Republican administrations.2

The phrase raising the debt ceiling sounds like new obligations are being made, but the term debt refers to bonds (debt instruments) and the ceiling is the artificial limit established by the 1917 legislation that everyone has forgotten about. This is simply about managing the payment of obligations already incurred by the government during the budget and appropriations process. It is about fiscal responsibility. We pay our bills. It should be perfunctory, but this time it is being made political.

Congress is threatening to default on U.S. Obligations made during its own budget and appropriation process. Again. The last time this stunt was pulled was when John Boehner was Speaker of the House and Barack Obama was President. In 2010, Tea Party Republicans won 63 house seats and they wanted to make a big splash, so they threatened to abrogate their fiscal duty to permit the Treasury Department to function at a new level. They almost sunk the U.S. And global markets in the process. Disaster was averted, but narrowly.

Using the full faith and credit of the U.S. Government as a political bargaining chip is like playing catch with an unpinned grenade. It is going to explode. No question about it.

So, what happens if Congress fails to authorize the Treasury Department to operate at the necessary level? The U.S. Defaults on all its obligations. It becomes a deadbeat overnight. It would be the government shutdown to end all shutdowns.

But we can avert this crisis if we let congress know we are watching them and that we understand this better than they think. I have never asked clients to write to their Congress member, but I am now. Please write a civil, but firm letter that you do not hold with this nonsense. Let them know that you see them, and you are watching what they do, so they’d better take their responsibility seriously.

I include some tidbits you can use to spice up your letter. Please use as you wish:

  • The full faith and credit of the U.S. Government is too valuable to use for cheap political tricks.
  • The U.S. has NEVER defaulted on a single debt. That is why the full faith and credit of the U.S. Government is the global standard of investment security.
  • If Congress fails to raise the debt ceiling, the dollar will no longer be the world’s currency standard. Everyone receiving government checks, from active-duty military to Social Security and Medicare recipients to federal workers, researchers, forest rangers, etc. would be left unpaid for the work they have already done and for the benefits owed to them by law.
  • If a foreign country conspired to shut down our government so completely and thoroughly as a default on our debt would do, we would be at war with them in an instant.
  • We don’t negotiate with hostage takers for a reason, and yet some members of Congress have even bragged about holding the debt ceiling hostage. What is wrong with them?!?
  • The sterling credit rating of the U.S. government will be gone, which means every dollar we need to borrow in the future will cost multiples more.
  • The time to cut spending is during the budget and appropriations process, not after you received the bill.
  • If Congress really wanted to do something iconoclastic, you could simply abolish this artificial construct altogether.

Find your Representative:

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Call if you need me (704) 502-6649

Home Office:2540 Country Club Lane, Charlotte, NC 28205
Can also see you in Steele Creek office, or in your own home.

End notes:

1 Bonds are promissory notes to repay a debt at some time in the future. In the meantime, the bond pays an annual rate of interest (sometimes called the coupon rate, because the bonds used to be issued with a fringe of tear off coupons you could take to the bank).

If you change the maturity date or the coupon rate, you change the issue. Can you imagine how tedious this would be if Congress had to approve each and every issue?

The U.S. issues $1,000 bonds in 100,000 round lots. These are purchased by individuals, pension plans, financial institutions, and other governments (including U.S. states).

2 Ron Elving, NPR, January 21, 2023, “Why we have a Debt Ceiling and why this trip to the brink may be different.”

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