In light of the escalating debt crises in Washington, I have recently been asked by several clients why this keeps happening, and what will happen if a deal doesn’t get struck? Today, I thought I would give a very brief explanation for why our politicians are seemingly always arguing about raising the debt ceiling, and what the potential ramifications are if one of these times an agreement is not reached.
The debt ceiling was first put in place by Congress to limit the government’s ability to borrow money with the Public Debt Act of 1939. At that time, the aggregate limit of all federal debts was capped at $45 billion. For context, that was roughly half of what our nation’s GDP was at that time. In comparison, according to the Bureau of Economic Analysis, today the debt limit is $31.4 trillion or roughly 1.25 times our total GDP as a nation. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/#the-debt-ceiling
How did the debt get so much larger? It’s very simple. Increases in government spending has led to Congress voting to raise the debt ceiling over 90 times since it’s the original limit was put in place. Before any of you start pointing the blame on one party or the other, know that deficit spending is about the only thing Washington does on a bipartisan basis. In fact, Republican and Democrat presidents have each signed bills to increase the debit limit nearly the exact number of times since it was first raised in 1941.
Unfortunately, in our current politically charged environment, Republicans and Democrats are refusing to compromise on yet another increase to the debt ceiling. Today, each side seems more concerned about who gets blamed for problems than actually solving them.
With that being said, in Washington a politician’s loyalty is ultimately always to themselves more than their party. Because they all know it would be political suicide to not come to an agreement, I believe in the end after a ton of blustering the debt ceiling will be raised as it always has been. Even if they wait until the 11th hour.
However, what if I’m wrong? What if the division in DC has become so toxic that we actually do default this time? The people it could directly impact would be those the federal government is currently paying. People like seniors receiving Social Security benefits, federal employees, or treasury bond holders. Payments to these groups could be reduced, delayed or even worse, cancelled altogether.
The ripple effect of such a default would go beyond just those directly owed money from the government however. Fears of an economic panic would almost certainly lead to a massive sell off on Wall Street and corporations would likely begin laying off workers in preparation of a tightening economy. According to Moody’s Analytics, an estimated 1 million jobs could be lost in the first week. https://www.cnn.com/2023/05/02/politics/debt-ceiling-social-security-economy/index.html
The economic impact could not only harm us, but the world as well. Secretary of the Treasury Janet Yellen said last week that “a default would spark a global downturn” and “would risk undermining U.S. global economic leadership”
With such potentially calamitous repercussions of not raising the debt limit, you might be asking why are Republicans in Congress risking our nation’s economy by not passing a clean debt ceiling increase? I think the reason is twofold. First, cynically I believe they wish to do all they can to politically harm President Biden before the next presidential election. His approval numbers are low and they believe this could weaken his support further.
But perhaps the nobler reason is many in the GOP realize just how out of control our federal spending has become, and need to do something shocking to wake the American people up to the unsustainable way in which we continue to deficit spend before we find ourselves so buried by debt that default is inescapable.
As I said earlier, while it may come down to the wire, I believe wholeheartedly that an agreement will be made, and the debt ceiling will be lifted before we go into default. However, I also hope this crisis helps us all come to a realization about the danger debt poses to our long-term prosperity, and that we all begin to start acting more fiscally responsible before it’s too late.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)