The U.S. Debt Ceiling
Earlier this year, the U.S. government reached its debt ceiling, which is the legal limit on the total amount of federal debt. The money raised from borrowings is used to pay existing obligations, such as interest on Treasuries, Social Security benefits, Medicare, and military salaries. The U.S. is unlike many other countries in that they have laws enacted to limit the amount of debt it can have. The debt ceiling is most often quite contentious in Congress and the following overview provides a brief history.
Until World War I, Congress was required to approve each issuance of debt in separate legislation. Then in 1917, the Second Liberty Bond Act was enacted to simplify the process and enhance borrowing flexibility for issuance of government debt, eliminating the need for legislation each time. In 1939, Congress created the first aggregate debt limit, covering nearly all government debt, at $45 billion, which was 10% above total debt at the time. Fast forward and, since 1960, the debt limit has been raised, extended, or revised 78 separate times by Congress—49 times under Republican presidents and 29 times under Democrats. Currently, the government’s debt has grown to just under $31.5 Trillion. One important note: paying the debt is not about future spending. It is about meeting the cost of existing commitments the government has made.
Currently, Congress is back debating the debt limit as the limit enacted in 2021 was reached on January 19, 2023. Since then, Treasury Secretary Janet Yellen has taken “extraordinary measures” to prolong defaulting on any debt. It is estimated that the limits of reserves and other measures of meeting obligations will be reached in the third quarter of 2023. The extraordinary measures being employed by the Treasury Department were first utilized in 1985, and they have been used 6 times since May 2011.
We have seen this movie play out during these decades and they can be unnerving and impact financial markets. Yet, despite the back-and-forth bickering in Washington, we expect “better heads” to prevail. If the past is prologue for the future, the negotiating may continue until the last minute when time pressures force a compromised deal, as defaulting is not a viable option and would have global repercussions. The government’s obligation to pay its debts was written in the Constitution in the 14th amendment. Ultimately, those that govern our country will put emotions aside, practice the art of compromise, and negotiate with our country’s best interests ahead of their personal agendas.
We bring this to your attention as it will become more of a media focus as time marches on. Importantly, markets discount future events so the anxiety created by this logjam may be spread out over weeks. We are monitoring developments closely and will make appropriate adjustments, if needed and warranted.
Please view us as a resource for all your financial questions and needs, and as always, please contact us if we may be of assistance.