Will the U.S. Finally Raise the Debt Ceiling?

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Washington D.C. has done it again.

After enduring an embarrassing month-long government shutdown this past fall, it seemed that Congress was beginning to act responsibly in relation to the U.S. debt ceiling. Passing the Continuing Appropriations Act, the U.S. government was able to continue borrowing money to fund itself until Jan. 15.

Unfortunately, that is well past. With the second provision of the act, suspending the debt ceiling until Feb. 7 ending last week, Congress has gone back to pointing fingers at each other while the full faith and credit of the U.S. hangs in the balance.

What is the debt ceiling?

Used by the government to limit the amount of debt that can be issued by the U.S. Treasury Department, the debt ceiling is a calculated figure that takes into account all publicly held debt as well as any intra-governmental account debt. While this is not an expression of how much money the U.S. government can borrow, the ceiling does mark an arbitrary limit past which the U.S. Treasury cannot finance new debt.

Should this ceiling be exceeded and no extraordinary measure be enacted to either raise the ceiling further or finance previously taken debt, the U.S. would be forced to default on some of the debt. Manifesting in unpaid wages and lost revenue, this may seem as an acceptable solution to some, but it would be far less palatable to the immediately affected. Any default would have incredible consequences for a world economy already reeling from Asian market instability.

If nothing is done...

Treasury Secretary Jack Lew notes that if no resolution is reached, the U.S. Treasury would be forced to pay its debts with on-hand assets plus any new revenue gained day-to-day. Given that he expects on-hand assets to be no more than $50 billion and that daily expenditures can be as high as $60 billion, the government seems primed for a minor meltdown.

If a default does occur, the U.S. has few choices, none of which would be popular. Another more severe government shutdown could occur, delaying federal services at an extremely inopportune time. The government could attempt to bring more revenue streams in and raise taxes. This is a politician's worst nightmare for obvious reasons. Finally, the government could default on portions on internationally held debt, which would extremely hurt the credit rating of the U.S. (currently at AAA). This would hamper U.S. investments in the long term as other countries could be reticent about the precedent any default might set.

If something is done...

The question is what to do. Given the misconception of what the debt ceiling does, increases in the debt ceiling are unpopular with voters, leading any potential increase to be about as likely as spotting the Loch Ness monster in the Hudson River. 

The U.S. Treasury can also exchange on-hand securities for non-Treasury based securities, which has been done before in 1985. This measure is a stop-gap at best, and only diffuses risk more widely; any default that comes after this would affect more economic actors than if debt were held only by the U.S. government.

Finally, and most likely, the government can suspend the debt ceiling until a later date. Given that this allows for the proverbial can to be kicked down the road for someone else to deal with, this is a win for politicians and a loss for nearly everyone else. 

While this will be worse later, at least both Congressional parties are finally waking up. Republican House Speaker John Boehner has made it clear several times recently that default "is not an option." Democratic leadership has been somewhat quiet in remarking on the current situation, but have been releasing signs that they are open to discussion. 

The verdict? Something will be done, though it may not be an increase in the debt ceiling. While something is better than nothing, it may be time for the American public to encourage an increase in the debt ceiling or a realistic discussion on financial costs in the economy today.

In the end, while the U.S. has a AAA credit rating, it may not be the best time to invest in the U.S. government.

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  • Report this Comment On February 11, 2014, at 1:54 PM, pondee619 wrote:

    "Used by the government to limit the amount of debt that can be issued by the U.S. Treasury Department"... Without Congress' approval of each and every additional bond issuance.

    Under Article I Section 8 of the United States Constitution, only Congress can authorise the borrowing of money on the credit of the United States. From the founding of the United States until 1917, Congress directly authorized each individual debt issued. To provide more flexibility to finance the United States' involvement in World War I, Congress modified the method by which it authorized debt in the Second Liberty Bond Act of 1917.[2] Under this Act, Congress established an aggregate limit, or "ceiling," on the total amount of new bonds that could be issued.

    The debt ceiling reduces the number of votes needed in Congress to run the finances of the Country. Without it, these battles would occur every day. However, I do not think that the debt ceiling can be "suspended" Constitutionally as only Congress can authorize the borrowing of money on the credit of the United States. Without an extention of the debt ceiling, Congress would have to go back to authorizing each and every bond issuance This would, however, give them some buzy work to do and, maybe, keep them out of trouble.

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Kurt Avard

A January 2014 addition to the Motley Fool team, Kurt Avard prefers to focus on the "dark" side of business and how it interacts with politics. Rarely writing on the same thing twice, he feels that, if he manages to convince you that the two are inexorably linked, he has adequately done his job. Follow him on Twitter @kurtsavard

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