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

Treasury Secretary Lew: Raise the debt ceiling by Feb. 27 or else.

Feb 11, 2014 at 7:34AM

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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