Question about the debt limit

[lawman]

I know that no one knows for sure the ramifications of a failure to raise the debt limit but I would be interested in knowing what if might look like if it happens.

 

[MichaelB]

<mod note> A discussion on debt limit should stick to technical and financial aspects. Any politics will lead thread being closed.

 

[SecondCor521]

The Treasury basically has a big checkbook, but they can only write checks up to the debt limit because that is set in law by Congress.

We're approaching that limit now, but it is typical for the Treasury to use what are termed "extraordinary measures" - basically juggling things around. Current projections are they can make things work until some time in June via this juggling.

If the debt ceiling is not raised at that point, then the Treasury would have to decide which bills not to pay. It is my understanding that the Treasury has discretion over which bills they would not pay and which ones they would. Since the Treasury is part of the Executive branch, it is possible that the President as head of the Executive may choose to direct the Treasury Secretary in those choices.

If that process resulted in the non-payment of any debt obligations of the US government, such as Treasury bond payments or interest payments, then the US would be in default. The US could seek aid from the IMF I suppose, but I don't know if they have enough assets to cover much.

It is my understanding that we do have enough income to pay all of the interest on the debt just with incoming receipts (US government income from income taxes, tariffs, etc.), but something would have to give.

As a practical matter, any default on the US debt would result in higher interest costs on the debt going forward. Beyond that, there would be a lot of hard-to-predict consequences, since it hasn't ever happened before and most people assume that it never will.

In theory, another option is that the US could sell assets to keep things going. Selling assets while bankrupt isn't a good way to have the upper hand in negotiations, and it'd be a bad look to auction off Yellowstone National Park or some F-35s when in such a bind. There may be some legal reasons we couldn't do that as well, but I've never heard it discussed much.

As a historical note, we've been in these waters several times before. In those previous occurrences, we've also shut down parts of the federal government and/or not paid federal workers for a brief while.

 

[njhowie]

This game plays out every year, and every year it gets resolved - because it has to be. This time will be no different. It's been proposed a number of times to simply eliminate the debt ceiling as it serves no real purpose in that it is a requirement for it to be raised. Bills waiting to be paid are for services already rendered under the existing/previous budget, and past accumulated/authorized debts needing to be serviced.

Having said that, not raising the debt ceiling would likely trigger a government shutdown (we've seen that before for various reasons), a default on the country's debt (in the short term), and bond and equity markets would likely become extremely volatile over the short term. The country would also likely see ratings downgrades on its sovereign debt (Treasuries), and this will make future financing more expensive. Understand, that these would be short-term issues as ultimately, the debt ceiling will be raised and issues would be resolved.

 

[lawman]

Would it be possible for the Fed to choose hyperinflation by simply printing more money?

 

[Aerides]

Here's a pretty good explainer from Brookings (non-partisan) from 2021:

https://www.brookings.edu/blog/up-f...should-we-be-if-the-debt-ceiling-isnt-lifted/

Of course, what's often missed is the debt limit is needed to make good on committed expenditures - think like..making minimum payments on your credit card for stuff you bought last year, the year before that, and 5 years ago, still all ongoing. Cutting spending today or raising taxes now doesn't fix that.

Basically, the effects compound the longer it goes on. A week? eh, a month...uh on. And if it went on for months, it would be pretty bad, and impact the global markets, the dollar all deep negatives.

Not being able to take that trip to Yellowstone (NPS would shut down) over the summer would be the least of our problems.

 

[lawman]

Here's a pretty good explainer from Brookings (non-partisan) from 2021:

https://www.brookings.edu/blog/up-f...should-we-be-if-the-debt-ceiling-isnt-lifted/

Of course, what's often missed is the debt limit is needed to make good on committed expenditures - think like..making minimum payments on your credit card for stuff you bought last year, the year before that, and 5 years ago, still all ongoing. Cutting spending today or raising taxes now doesn't fix that.

Basically, the effects compound the longer it goes on. A week? eh, a month...uh on. And if it went on for months, it would be pretty bad, and impact the global markets, the dollar all deep negatives.

Not being able to take that trip to Yellowstone (NPS would shut down) over the summer would be the least of our problems.

Interesting article..Thanks

 

[njhowie]

Would it be possible for the Fed to choose hyperinflation by simply printing more money?

Absolutely. That is part of the thought process in having inflation at some "reasonable" level, be it 2% or 3% or some other number - existing debts get paid back with cheaper future dollars.

 

[Texas Proud]

It is not just the checks going out the door, but what can be borrowed... hence a debt limit...


Current expenses are more than the cash that is coming in... so to make ends meet you have to add more to the national credit card... it is easy for the gvmt to get cash to pay the bills... but since there is a 'credit limit' called the national debt limit it is like the credit card is maxed out...


The government is just asking to increase the max credit card limit...


There is a flaw in the description above... it is not due to amounts that have already been spent... it is amounts that have been approved to be spent but not yet spent...



If thee was no new spending the gvmt could just issue new bonds to pay off the old bonds with zero added to the debt...

 

[pb4uski]

They should just get rid of the debt ceiling entirely.... it's a stupid and artificial mechanism.

Or if they are going to have a debt ceiling then not allow any appropriations that would cause the debt ceiling to be exceeded just like that you can't charge any more on your credit card if your credit limit is exceeded.

I wonder... if they got rid of the debt ceiling so there would no longer be any brinkmanship that might result in a default, I wonder if interest rates might go down because the risk and probability of default would be so much lower.

I am curious as to why the US government didn't finance its debt with longer term issuances during those many years when interest rates were low.

 

[ownyourfuture]

No worries with Modern Monetary Theory (MMT)
With MMT, anything that is technically feasible, is financially affordable, because a government that creates its own currency can borrow in that currency & then pay off the resulting debt by creating more of it

FYI: (the dancing figure represents sarcasm)

 

[flyingaway]

If they could get rid of the debt limit, then there would be no limit on the annual government budget.

 

[Montecfo]

Back jn the day the debt limit battle gave way to an agreement to limit deficit spending, which seems to be a good idea in an era of unfettered spending by both parties.

The Budget Control Act of 2011 called for so-called sequestration, or automatic spending cuts, if Congress could not agree on spending level specified in the Act.

I would not be surprised if something similar could come into play, but who knows?

 

[pb4uski]

If they could get rid of the debt limit, then there would be no limit on the annual government budget.

The debt limit has nothing to do with the budget or appropriations so what you posted is nonsense.

 

[SecondCor521]

The debt limit has nothing to do with the budget or appropriations so what you posted is nonsense.

I thought they were related.

The budget is typically a proposal from the Executive branch to Congress.

Congress passes appropriations measures which are similar to the budget proposed, but sometimes more than the budget request. (I think there are also sometimes non-budgeted appropriations.)

Appropriations, to the extent that they exceed revenues, requires borrowing which adds to the debt.

The debt is subject to the debt limit.

What am I missing?

 

[flyingaway]

The debt limit has nothing to do with the budget or appropriations so what you posted is nonsense.

Do you think there is anything that DOES make sense?

 

[MichaelB]

One of the things that characterizes our community is the respect we show for each other. Anyone who can’t disagree without being disagreeable should move on to another topic.

 

[Andre1969]

In good news, the last two times we hit the debt limit, and congress delayed doing anything, the stock market did pretty well during that timeframe.

At least, the last two times I'm thinking of are October 2013, and December 2018. That 2013 shutdown got me 11 days off work, plus Columbus Day. The 2018 one lasted into January, and I was out something like five weeks.

 

[donheff]

They should just get rid of the debt ceiling entirely.... it's a stupid and artificial mechanism.

Or if they are going to have a debt ceiling then not allow any appropriations that would cause the debt ceiling to be exceeded just like that you can't charge any more on your credit card if your credit limit is exceeded.

I wonder... if they got rid of the debt ceiling so there would no longer be any brinkmanship that might result in a default, I wonder if interest rates might go down because the risk and probability of default would be so much lower.

I am curious as to why the US government didn't finance its debt with longer term issuances during those many years when interest rates were low.

+1 The debt ceiling is an artificial mutually assured destruction construct that enables dangerous brinksmanship. As far as I can see it is bipartisan since neither party has bothered to do away with the law when they have had clear margins. After Standard and Poor's lowered our credit rating the last time we flirted with default it was clear we should simply do away with this nonsense. The answer is simple: the Treasury should be free to borrow as needed to pay for the debt that has been created by Congress and signed into law by the President. Heck, the 14th amendment demands it:

Section 4 Public Debt
The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

 

[pb4uski]

I thought they were related.

The budget is typically a proposal from the Executive branch to Congress.

Congress passes appropriations measures which are similar to the budget proposed, but sometimes more than the budget request. (I think there are also sometimes non-budgeted appropriations.)

Appropriations, to the extent that they exceed revenues, requires borrowing which adds to the debt.

The debt is subject to the debt limit.

What am I missing?

What you are missing is that the debt obviously doesn't work because Congress routinely passes appropriations which, combined with debt from past spending, exceed the debt limit and then the same Congress later goes crazy when it is time to increase the debt limit... which only needs to be increased because for appropriations that Congress passed.

 

[pb4uski]

Do you think there is anything that DOES make sense?

What would make the most sense is to get rid of the debt limit to remove the political brinkmanship with the credit worthiness of the United States of America since the existence of the debt limit obviously doesn't curb spending in any way, shape or form because we continually have these crises where we need to increase the debt limit.

If we need a mechanism to curb spending have it apply to appropriations rather than payments. So Congress would pass a debt limit that would prevent Congress from making any appropriations that, combined with existing debt, would exceed the debt limit. But I think the problem with that might be that I'm not sure if one Congress can pass a law that encumberr another Congess (faint recollection).

It would be like a credit limit on a credit card. The cardholder can't make a charge if that charge, combined with existing unpaid charges, exceeds the credit limit.

With the current debt limit if you charge more than your credit limit then you refuse to pay for the excess? Doesn't make sense.

Or another solution if you keep the debt limit would be to amend it so it does not apply to debt repayments... so once the limit is reached all payments other than existing debt could be deferred but payments of principal or interest on existing debt would have priority and come before all other disbursements. That would take the risk to the full faith and credit off the table and put it on SS payments, military and government worker salary payments and other areas that have much louder voices politically.

 

[perez99]

Appropriations, to the extent that they exceed revenues, requires borrowing which adds to the debt.

The debt is subject to the debt limit.

What am I missing?

The issue is that is nonsensical for congress to approve spending (via appropriations) but then later require another approval (debt limit) in order for the government to meet the obligations it has previously approved.

 

[pb4uski]

The issue is that is nonsensical for congress to approve spending (via appropriations) but then later require another approval (debt limit) in order for the government to meet the obligations it has previously approved.

^^^ He said it a lot better than I did.

 

[Mark1]

I know that no one knows for sure the ramifications of a failure to raise the debt limit but I would be interested in knowing what if might look like if it happens.

I too thought about posting something on the debt limit and any actions I might take related to it, but I didn't believe the thread would last more than a few minutes.

My question was around what to do. Most thing won't impact me immediately so I can just wait it out (SS payments, stock market crash, etc.). My biggest concern is what happens to my MM fund(s) if there is a run on them(?). Can I just sit tight and wait it out and not be impacted?

 

[lawman]

Does everyone agree that default on treasuries would be one of the last things to happen?

Will any of you avoid treasuries due to this issue?