Congress will soon vote on raising the debt ceiling…..again. Although there is little question about the outcome, there will certainly be a great deal of finger pointing as politicians from both sides of the aisle attempt to use the issue to gain political points with their constituents. In this article, we will explain the debt ceiling; examine a few rules that govern it, discuss the current national debt, and reveal what could happen if Congress fails to raise it.
Debt Ceiling 101
The debt limit—a.k.a. the debt ceiling—is the maximum amount of debt that the Department of the Treasury can issue to the public and to other federal agencies. Congress has raised the debt ceiling 74 times since March 1962 and even suspended it on occasion. The government’s debt ceiling is very similar in concept to an individual’s credit card limit, with a few wrinkles. One wrinkle is that not all of the government's debt is subject to the debt ceiling.
Which Debt is Subject to the Ceiling?
Which type of debt is subject to the debt ceiling and which is not? According to the Congressional Budget Office, there are two types of debt subject to the statutory limit: debt held by the public and debt held by government accounts. Debt held by the public consists of U.S. Treasury Securities held by outside investors such as individuals, the Federal Reserve, and foreign countries. Debt held by government accounts is debt issued to the federal government’s trust funds and other federal accounts for internal transactions of the government. This includes trust funds for Social Security, Medicare, military retirement, and civil service retirement and disability. In addition, this debt is not publicly traded.
The Current Public Debt
As of September 30, 2015, the national debt was $18.1 trillion. The public portion was about $13 trillion while the debt held by government accounts was close to $5 trillion. The interest payments alone are one of the largest items in the federal budget. In fact, the amount of interest on the national debt is estimated to be accumulating at a rate of over one million dollars per minute. Moreover, the average interest rate on the debt is 2.35%, down slightly from 2.43% two years earlier.
The U.S. is easily the largest debtor nation in the world. To put this into perspective, the total debt of all countries in the world is slightly over $61.2 trillion. The United States has 4.4% of the world’s population, generates 23.2% of global GDP, and owes nearly 30% of the total global debt. Unfortunately, Congress is still over spending. At more than $434 billion, the federal deficit is slowly declining. Even so, around the year 2020, it is expected to begin expanding due to entitlement programs and demographics.
What Could Happen if the Debt Ceiling is Not Raised?
As the vote draws near, there will be a great deal of misinformation spread about this issue. To be clear, if Congress fails to raise the debt limit, the Treasury will not be able to issue additional debt if it causes an increase in the amount outstanding. However, it will be able to issue new debt in amounts equal to maturing debt. Therefore, it is unlikely that the U.S. would default on maturing debt. This is not to suggest there would be no interruptions. Failure to raise the debt ceiling could result in an inability to make timely interest payments on the outstanding debt and there would likely be an interruption of various government services. This could also lead to greater credit risk (i.e. a lower credit rating for the U.S.), which would result in higher interest rates.
Conclusion
This is an important issue. However, the question is not should we raise the debt limit, but rather, should we cut expenses? This is very much like the individual who is constantly asking for more and more money to pay his expenses. At some point, one should ask if he might have a spending problem. After all, how much debt is enough? Eventually, it will cause the entire system to implode.
