The debt ceiling

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Everyone is saying it will be Armageddon if the US doesn’t raise the debt ceiling, because then it will be unable to pay its creditors for some time, which will raise the future cost of borrowing, and then have a giant ripple effect throughout the rest of the economy.

But here’s what I don’t understand. Isn’t the fact that we are *approaching* the debt ceiling already an indication to creditors that “Hey, we can’t pay the debt without borrowing more money.” Yet we’re fine.

Doesn’t that distress signal already basically indicate that we can’t really pay the debt? It would be like asserting “It’ll really damage your credit score if you miss a payment” to somebody… who has paid their last 3 years of payments *with other credit cards.* Shouldn’t their credit *already* be shot at that point?

Why do the people lending the government money see the government any differently? Why is our credit considered excellent when we pay off our creditors with other creditors money?

In: Economics

The ceiling of a debt is “0.”

We have a fiat money system. Laws and regulations give our $ value.

One day, we’ll all wake up and realize we’ve been tricked.

Don’t confuse Government debt with Personal debt. Those two things are completely different in how they operate.

A lot of what you hear about government debt in the media is usually just scare tactics to equate government finances to person debt as a means to get public opinion onside to curb spending, which usually means justifying slashing programs.

A Government literally has the ability to print money, so worst case scenario a government can print cash to pay it’s debts. That wouldn’t be ideal because it could lead to rampant inflation, but it can do that.

The debt ceiling is an artificial construct put in by the government as a symbolic means to curb government spending. It’s a piece of legislation not a hard line, so it can raised or removed if required.

Also the US government is not in as much debt as people think. Trillions of Dollars is a lot of money, don’t get me wrong. But if you compare the governments income to it’s debt it’s comparable to a person having a large but still reasonable mortgage.

**The US government is constitutionally required to pay its debts**, that’s part of why the credit rating for the US is so good. The US Congress couldn’t choose to default on the debt if it wanted to. Plus those in power understand the economic turmoil that would occur should the US default on debt, so they won’t let that happen.

Should the US government continue to borrow money on mass to operate? well that’s a matter of opinion.

Generally speaking no, there should be an effort towards paying down the national debt but eliminating it completely would be asinine. The entire savings and loans industry is propped up on Government Bonds and government debt is a critical part to how people save money for retirement.

Also government debt is closer to Corporate debt than personal debt in function and form. Most top Corporations are in as much debt comparatively to the US government and that’s considered responsible.

In crisis times like the pandemic one leading economic theory says ‘yes’ the government should borrow money in order to help keep the economy going. That keeps people employed and helps the economy rebound more quickly.

Another economic theory known as austerity says the government should curb spending during a crisis to keep money in the pockets of people and corporations. However this has been effectively debunked as an effective theory as it only serves to make the economic situation worse.

To save money on government spending the real answer is to stop borrowing Trillions to fight wars. The War on Terror is the single largest cause of increased government debt in the past 2 decades.

The “debt ceiling” is political farce. Congress knows the state of the debt and passes a tax and spending bill (the budget essentially) every year. At the time of the passing of the bill, pretty much everyone (who bothers to) knows the level of debt that the US will be in. (All of this information is available from the US govt – [www.treasurydirect.gov](https://www.treasurydirect.gov))

The debt ceiling is therefore a debate about closing the barn doors after the horse has bolted. Congress already approved the spending and, from simple math, the total amount of debt needed. It was introduced (by Republicans AFAIK) to make political hay over their “concern” over the debt. (For example, when the Republican congress approved their budgets that required debt ceiling increases, they quietly increased the ceiling)

This “debt ceiling” is a completely artificial number. It has no basis in policy. It isn’t developed from the bottom up with some careful analysis of spending needs. It isn’t a number imposed by market forces.

The bad thing about repaying credit card debts with credit cards is twofold:

1) You’ll never pay it off, and

2) It’ll grow exponentially due to interest.

(1) isn’t a problem for the US government. The government doesn’t retire or die (and if it ended, then honestly we all have bigger problems). They don’t ever have to pay it off, and the growing economy will decrease the size of the debt over time relative to its ability to pay.

The US government also isn’t going to abscond or default. It’s just not a worry the way it is with personal debt.

(2) also isn’t a problem because of low interest rates. The US government is really safe to lend money to, so people are happy to lend them money at really low rates. 10 year yields on bonds (people lending the government money for 10 years) is 1.27% per year.

Once you account for inflation, the government is better off borrowing and spending today than not borrowing and spending tomorrow.

That’s all predicated on a low interest rate though, which relies on people being sure that the US government will repay their debts. Not raising the debt ceiling would cause people to doubt that, making servicing new and existing debt vastly more expensive.

> Isn’t the fact that we are approaching the debt ceiling already an indication to creditors that “Hey, we can’t pay the debt without borrowing more money.”

The problem with the US hitting the debt ceiling isn’t the signal that it sends. Being “unable to pays its creditors” isn’t a metaphor or an indication that something might happen in the future – it literally means public servants don’t get paid. This doesn’t happen if the debt ceiling gets raised, which is why the distinction between being below it and over it is a meaningful one.

The debt ceiling is meant to be a way for politicians to take stock into government spending and to see if we really need to have the large deficit we have or perhaps we should cut some programs.

The mathematics behind it all is pretty simple though. The government has a budget that gets passed, i.e. Congress and the President sign off on it. Since the value of total debt and the debt ceiling is known, the additional deficit calculated in the budget just gets appended to the debt ceiling. The time to talk about the debt ceiling and deficit is during the budget process, not the debt ceiling discussions.

It’s like saying you have a $1,000 credit card balance, you just agreed to spend $200 and you’re shocked that the total balance is now $1,200. The time to talk about it is during the $200 spending, not when the statement comes in.

Although /u/DarkAlman wrote an excellent comment, I’d like to add that the media also talks uses the personal finance example as a way to dumb it down for people. Considering we’re talking about trillions, people just can’t imagine that kind of money.

They’re correct as far as there is no limit to how much money we can have. First of all, lots of nations have no problems lending to us and presuming they stopped, we can still issue money. Although this mathematically creates inflation, the inflation can be countered with how our currency relates to other governments. For instance, during the 2008 disaster, most of the world was on fire but we were sinking in relation to those being on fire which means we’re *relatively* better and as a result, people would rather lose 10% than 25%. This confidence and investment nullified any inflation created by printing more money. This is unlike other governments, like Zimbabwe and Venezuela as modern examples, where they print the same money we are (though at a much higher rate)… but nobody cares about pouring massive investments into those countries. Therefore massive inflation.

As far as investments, the top countries for these are typically:

* Japan, whose 10-year bond yield is 0.016%
* Germany, whose 10-year bond yield is -0.444% (yes, negative, i.e. you’re losing money)
* UK, whose 10-year bond yield is 0.587%
* US, whose 10-year bond yield is 1.278%

There’s also China that has a 2.916% bond yield but… it’s China and it’s more difficult to invest there than the other 4 countries. Switzerland is also negative, at -0.397%.

US bond yields compared to the other major powers are so much higher that other people, companies, and governments would invest in our bonds.

The “debt ceiling” has nothing at all to do with the government’s creditworthiness.

Here’s how government spending works:

– Congress passes a law every year (and the President signs it) setting the amount of money the government is going to spend, and how it’s going to spend it
– The Treasury Department makes the money available to government agencies to spend, and they spend it according to law
– If tax revenues are inadequate to support all the Congressionally-required spending (as they historically have been for decades, except for the late Clinton administration), the Treasury sells debt to investors to make up the difference (so, in return for a promise to be paid some return on investment over the course of or at the end of a specific period of time, people give the Treasury money)

It is the Congress which sets how much money the government will spend in that first step. It used to be that that was how Congress exclusively controlled spending.

But starting in the late 1930s, Congress also decided to establish a “debt ceiling”, saying that the Treasury could only issue so much debt in order to fund Congressionally-directed spending. For decades, increasing the ceiling was uncontroversial, because, as everyone recognized, it was basically redundant — if Congress didn’t want to take on more debt, it should just not spend more than its revenues; and if it did want to deficit spend, it should expect to take on debt.

Only in the last 20 years or so (and really since Obama was elected in ’08) has the debt ceiling become something the Republicans use to grandstand over taking on a debt burden that, in many cases, they themselves voted for.

The reason it would be far more catastrophic to American creditworthiness than just issuing the debt is that it would indicate that our political system is broken to such an extent that it is actively refusing to honor its commitments. This is completely separate from the question of whether the American government’s debt burden appears sustainable to investors, which speaks to economic creditworthiness. It does, in no small part because (outside a weird incident in the ’70s that affected a small number of bonds) the US has been deficit-spending for decades and never failed to pay its obligations, and as the largest economy in the world it appears unlikely that it will fail to do so within the next, say, 30 years — which is the longest-term bond the Treasury sells.