Here we go again.
The clock is ticking down to another U.S. debt ceiling fight.
According to Treasury Secretary Janet Yellen, the federal government officially bumped up against the debt ceiling on Thursday, Jan. 19.
The debt ceiling is “the total amount of money that the United States government is authorized to borrow to meet existing legal obligations, including Social Security and Medicare Benefits, military salaries, interest on the national debt, tax refunds and other payments.”
On Dec. 16, 2021, a law went into effect setting the new debt limit at $31.381 trillion. Once the government hits that debt level, it can no longer sell Treasuries or other debt instruments to fund spending.
But this doesn’t mean the government will simply shut down. The Treasury Department can implement “extraordinary measures” in order to continue funding government operations.
According to a letter Yellen sent to Congress, the Treasury will redeem existing investments and suspend future investments in the Civil Service Retirement Disability Fund and the Postal Service Retiree Health Benefits Fund. It will also suspend investment in a federal employee retirement system savings plan. According to Yellen, these moves will “reduce the amount of outstanding debt subject to the limit and temporarily provide extra capacity for Treasury to continue financing operations of the federal government.”
It’s not clear how long the government can continue operating using these extraordinary measures. Most analysts estimate it will give Congress until sometime in June. It will depend somewhat on how much revenue the IRS collects this spring.
HISTORY
Congress imposed the first debt ceiling in 1917. The Second Liberty Bond Act capped debt at $11.5 billion. This was supposed to put some kind of restraint on government borrowing. Of course, it didn’t. Every time the debt approaches the ceiling, Congress simply raises it. Between 1962 and 2011, lawmakers jacked up the debt “limit” 74 times, according to the Congressional Research Service.
In 2013, Congress came up with a new trick. Instead of raising the debt ceiling, it just suspended it. In 2014, Congress set the debt limit with a built-in “auto-adjust.” The auto-adjust ended in March 2015 with the debt ceiling set at $18.1 trillion. After that, Congress simply suspended the debt ceiling three times.
After Congress set the current debt ceiling in December 2021, it took just 46 days for Uncle Sam to dig itself another $1 trillion in the hole, pushing the national debt above the $30 trillion mark. Less than a year later, in October 2022, the national debt pushed above $31 trillion, setting the stage for yet another debt ceiling battle.
And this one might be a doozy with Republicans controlling the House, Democrats running the Senate, and Joe Biden in the White House.
LOOKING AHEAD
Make no mistake, Congress will raise the debt limit.
It will posture. It will bluster. It will play a dramatic game of chicken. But when it’s all said and done, Republicans and Democrats will reach some kind of compromise. They will not leave the current debt ceiling in place. That would mean default – something nobody is seriously willing to contemplate.
In an honest world, the U.S. government would just go ahead and default. There is no way the federal government will ever pay off a $31 trillion-plus dollar debt.
And the debt is only going to get bigger.
The government can’t even get its budget deficits under control. The Biden administration is spending money at a half-a-trillion-dollar per month clip. Meanwhile, the Republicans talk a good game about spending cuts, but it’s nothing but window-dressing. The GOP had ample opportunity to slash spending during the first two years of Trump’s administration when it controlled both the White House and Congress. Instead, it ramped up spending and ran massive deficits. In fact, in fiscal 2019, the Trump administration ran a budget deficit just shy of $1 trillion. It was the fifth-largest deficit in history, topped only by the trillion-plus deficits run by the Obama administration in the wake of the Great Recession.
Theoretically, Congress could solve the debt ceiling problem by cutting spending to a level where the government no longer needs to borrow. But that’s clearly not in the cards.
As Peter Schiff noted in a recent tweet, the feds are running a Ponzi scheme to keep the government solvent.
The U.S. Treas. Sec. has admitted the only way to avoid a default on the National Debt is to raise the #DebtCeiling so the Govt. can borrow from new lenders to repay existing lenders. This amounts to an official admission that the U.S. is running the world's largest Ponzi scheme.
— Peter Schiff (@PeterSchiff) January 16, 2023
Given that the debt ceiling has never meaningfully restrained borrowing and spending, why doesn’t Congress just scrap it altogether?
I think there are two reasons.
First, doing away with the debt ceiling would expose America’s fiscal irresponsibility to the world. We all know the federal government has a spending problem. But the debt ceiling creates the illusion of responsibility. It’s like a magic trick. We all know it’s not really magic. It’s an illusion created by the magician. But we like to believe it’s magic. It makes us feel good. The debt ceiling is an illusion that allows Americans to feel like their “representatives” are acting responsibly.
Second, the debt ceiling is ready-made for political theater. And there’s nothing politicians love more than political theater.
Republicans and Democrats are already jockeying for position in the debt ceiling fight. Republican leadership is demanding spending cuts before it will consider lifting the ceiling. A week ago, White House press secretary Karine Jean-Pierre said, “We will not be doing any negotiation.”
“I think it’s arrogance to say: ‘Oh, we’re not going to negotiate about anything,’ especially when it comes to funding. If anyone had a child and their credit card kept hitting the limit, you’d want to change the behavior,” Speaker of the House Kevin McCarthy (R) said.
Yellen warned that a failure to raise the debt ceiling would have dire consequences.
Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”
Yellen’s not wrong. And this is exactly why Congress will raise the debt ceiling – or simply kick the can down the road by suspending it again.
In the meantime, brace yourself for hot political rhetoric and a lot of finger-pointing across the political aisle. We may even get another mythical government shutdown. But trust me, they won’t shut down any of the important things. The NSA will keep spying on you. The IRS will continue to collect taxes from you. The wars will rage on. And members of Congress will continue to collect their paychecks. There’s always money available for the things the government really wants to do.
The whole debt ceiling debate is nothing but political gamesmanship. So, grab a chair. Pop some popcorn. And enjoy the show.
