The US Debt Ceiling Nears Default Once Again

As we approach the US debt ceiling deadline – October 18th, 2021 – both investor and consumer confidence are gradually becoming more and more shaken. In this article we will be discussing the history of the US debt ceiling. We will also look at what could hypothetically happen if the United States went into default.

The Debt Ceiling Explained

Simply put, the US debt ceiling represents how much money the United States government is allowed to spend to pay its bills. These bills include Social Security, Medicare, Military salaries, Tax refunds, and interest on the national debt. The United States government borrows money from the treasury each year because the revenue collected through things like taxes is less than the amount that the United States government owes to its creditors.

One of the most common misconceptions is that the US budget and the US debt ceiling are synonymous. Although they are major components of the United States financial system, they both serve different purposes. The US budget is how much money the government plans on spending each year, while the US debt ceiling determines how much money the government can borrow to pay bills which already exist. The debts the US pays are often years old, and usually the biproduct of financial decisions made by previous administrations.

The History of the Debt Ceiling

In 1917, the United States government first put faith in debt and begun borrowing more money than it could pay back each year. The debt ceiling started as a biproduct of World War 1 as the US needed more money to effectively fund the war effort. At this point, the United States incurred its first debt of $11.5 billion. Since then, the government has incurred more debt each year. This has continued for over 100 years.

What Could Happen in Default

Just to be clear, it is highly unlikely that the US debt ceiling will be going into default any time soon. Although the United States has come extremely close to default on numerous occasions, the debt ceiling has always been increased or suspended in the nick of time. in fact, the US debt ceiling has been raised 98 times in the past, and on many of those occasions, the debt ceiling was modified within a matter of weeks or even days before default.

Congress is the only branch of the US government that has the power to modify the US debt ceiling, therefore modifications to the US debt ceiling need to be put to a vote. Often, delays in the modification of the US debt ceiling are due to internal political struggles, between the left and right parties. This begs the question: What could happen if the United States went into default?

Before going into default, the government will cease reinvesting in programs such as retirement funds, for a period. This allows the government to get a hold of instant liquidity to pay off debts, without raising the US debt ceiling. As a United States citizen with a retirement fund, this would mean your personal retirement fund would increase more slowly, or completely stop increasing temporarily. Keep in mind the United States government returns the retirement funds when it can, with interest; however, this is understandably a problem for those who rely on retirement funds.

If the US debt ceiling is reached, this means that the US treasury has run out of cash and is unable to borrow more. At this point, the government needs to decide which bills it will choose to pay from tax revenue and which bills it plans on pushing to the side until later. This is a terrifying situation for US residents particularly, as programs like retirement funds, Medicare, or paychecks for members of the armed service may not be as important to the government as they are to the people. According to a transcript from the Federal Open Market Committee (FOMC) meeting of August 2011, members of the Federal Reserve and US Treasury determined that they would prioritize Federal debt, over government programs, if congress did not increase the US debt ceiling.

Both high interest Federal debt, and the government’s financial obligation to the citizens of the United States are highly important. On one hand, the high-income debt incurred by the government would be more advantageous to pay off sooner than that which is owed to the United States citizens. On the other hand, the government’s moral obligation to take care of the citizens of the United States is an equally important consideration. Unfortunately, there are many ways to look at this hypothetical scenario; however, the results of surpassing the US debt ceiling would end in economic recession, or full-on depression. Furthermore, the result of an economic collapse within the United States would have a major impact on the global economy as well.

Another factor of this type of scenario is how surpassing the debt ceiling would trickle into the price action of the stock market and other investments, as well as how it would affect the interest rates of everyday bills. If the people of the United States lost faith in the U.S. Treasury, the interest rates for loans such as credit cards, car loans, mortgages and student loans would all increase exponentially. In the same way, if US Treasury security holders, as well as countries which the United States is indebted, were to lose faith in the system, it would make it difficult for the government to find buyers for securities. This could in turn cause the companies which currently support the system to move their operations elsewhere.

Conclusion

Regardless of the outcome, the results of the United States surpassing the US debt ceiling would be catastrophic, and therefore the debt ceiling must be raised if the United States government requires the money to stay afloat, although it is a controversial subject. It is unfortunate that we need to raise the ceiling on a program which is causing major inflation, however increasing the US debt ceiling is a necessary, yet symptomatic response. If the United States wishes to lower the US debt ceiling, it would be more advantageous to cut spending within the US budget, but that is a topic for another time!

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