FLASH
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Republicans and Democrats are once again arguing fiercely about the US debt ceiling, putting the country's financial stability at risk. Treasury Secretary Janet Yellen recently stated that June 1 is the "deadline" for reaching a compromise on raising the current debt limit, currently set at $31.38 trillion, to avoid a default that would be unprecedented in the history of this country.
The government hit that limit in January, and has since used "extraordinary measures" to keep paying its bills. Last-minute negotiations between the White House and Republicans have been largely fruitless as conservatives in Congress are pushing for major spending cuts and policy changes.
Meanwhile, President Joe Biden insists on lifting the debt ceiling, without making it conditional on anything. Negotiations are expected to continue in the coming days. So what is the debt ceiling, and why it may be time to lift it.
Just like us citizens, governments must borrow when they spend more money than they raise. They do this by issuing bonds, that is, securities that promise to pay money to their holders in the future, as well as make regular interest payments.
Government debt is the total amount of all borrowed money. The debt ceiling, which Congress set a century ago, is the maximum amount the government can borrow. It is a maximum limit for the national debt.
US government debt of $31.38 trillion is about 22 percent more than the value of all goods and services that will be produced in the US economy this year. About a quarter of this money, the government actually owes itself.
The Social Security Administration has accumulated a surplus and invests the extra money, currently $2.8 trillion, in government bonds. Even the Federal Reserve holds $5.5 trillion in treasury branches around the country. The rest is public debt.
As of October 2022, foreign countries, companies and individuals held $7.2 trillion of US government debt. Japan and China are the largest holders, with about $1 trillion each. The rest is owed to American citizens and businesses, as well as federal and state governments.
Before 1917, Congress authorized the government to borrow a fixed amount of money for a specified term. When the debt was repaid, the government could not borrow again without first seeking the approval of Congress. The Second Liberty Bond Act of 1917, which created the debt ceiling, changed this rule.
It allowed a continuous expansion of the debt even without the approval of Congress. Congress passed the measure to allow then-President Woodrow Wilson to spend the money he deemed necessary to fight World War I without waiting for lawmakers who were often absent to act.
However, Congress did not want to give the president a blank check, so it limited borrowing to $11.5 billion and required the passage of a new law for any new increase. Since then, the debt ceiling has been raised dozens of times, and has even been suspended in some cases. The last change occurred in December 2021, when it increased to $31.38 trillion.
Whenever the US approaches the debt ceiling, the Treasury Secretary can use "extraordinary measures" to preserve cash, a move that began on January 19 of this year. One such measure is the temporary non-funding of retirement programs for government employees.
The expectation will be that once the debt ceiling is raised, the government will make up the difference. But this will only buy a small amount of time. If the debt ceiling isn't raised before the Treasury Department exhausts its options, decisions will have to be made about who gets paid with the daily tax revenue.
Further borrowing will no longer be possible. Government employees or contractors may not be paid in full. Small business or student loans may be suspended. When the government cannot pay all its bills, it is technically in default.
Policymakers, economists and Wall Street are worried about a potential financial and economic crisis with catastrophic consequences. Many people fear that the government's failure to pay its bills would have severe economic consequences, rising interest rates, panicked financial markets, and perhaps even a deep economic crisis.
Under normal circumstances, once the markets panic, the US Congress and the president usually jump into action. That's what happened in 2013, when Republicans sought to use the debt ceiling to invalidate President Barack Obama's Affordable Care Act.
But we no longer live in normal political times. The major political parties are more polarized than ever, and McCarthy's concessions to right-wing Republicans could make it impossible to reach a deal on the debt ceiling.
One possible solution is a legal loophole that allows the US Treasury to mint platinum coins of any denomination. If the US Treasury were to cut a $1 trillion coin, and deposit it in its bank account at the Federal Reserve, the money could be used to pay for government programs or to repay holders of government bonds.
It can even be justified by referring to Section 4 of the 14th Amendment to the US Constitution: "The validity of the public debt of the United States ... shall not be questioned." Few countries have a debt ceiling like the US. So other governments function effectively without it.
America can do the same. The debt ceiling is dysfunctional and periodically puts the US economy at risk due to political posturing. The best solution would be to completely remove the debt ceiling. Congress has recently passed spending and tax bills that require taking on even more debt.
And why should we also approve additional borrowing? It must be remembered that the original debt ceiling was put in place because Congress could not meet quickly enough to approve the spending necessary to wage a war. In 1917, travel across the US was most often done by train, and it took several days to get to Washington. That made some sense then. Today, when Congress can vote online from home, that is no longer the case. / Bota.al
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