Let’s Just Call it the Debt Floor at this point….

Some of you may be wondering, when you hear politicians and the media throw around the term “Debt Ceiling”, what actually is the Debt Ceiling?  You may also be asking yourself or others, what does this have to do with me?  Well, how about everything and nothing at the same time.  Does that make it any less confusing?  We know, probably not.

The Debt Ceiling is based on several laws that limit the amount of money the United States government can borrow, from itself as it were, to pay its bills or meet obligations.  (That’s right the government needs to borrow in order to remain solvent. More on that in later articles) Some of the things included in that are Medicare or Medicaid claims, payroll for government employees worldwide, Social Security Benefits (that’s a big one if you are retired), payments on government securities, national debt interest payments, and ever-important tax refunds to citizens, just to name a few.

Forgetting about the numbers because most calculators do not go that high anyway, the actual limit allowed by law has been extended or suspended as it will so that there was not a breach of it, many times.  As of January of 2023, the limit had been reached again and the government basically took from Peter to pay Paul to keep all payments being made.

Now most of the time this is a basic formality for Congress to waive a magic policy wand and increase the limit as needed.  But in recent years or over the past five to seven, the Debt Ceiling (as we have written about before) has become a major political issue which is why it is now a debate or as some pundits have called it a knockdown drag-out war. 

While the politicians are squabbling over what to do and how to structure it, all the while arguing over each piece, the United States Treasury has been warning our elected officials that the United States would cease to have enough money to pay its obligations come June 1, 2023.   Yes, you read that right. 

Now that we have your attention, you may be wondering, well, what would happen if the government ran out of money.  (Which kind of boggles the mind right? How does a government actually run out of money?)  Keep in mind everyone, this has never “actually” happened before.  Each time the government needed more money to fund its obligations, it merely printed more.  If the government did not have the money necessary to meet its obligations, then like so many individuals in the world it would have to prioritize what gets paid first.   Which, when you are the government, is not so easy since a default on a government’s payments would have national and global financial effects that could last for years to come.

For starters what do you think would happen if the United States government stopped making payments on government debt and/or government securities? You know securities like treasuries, that foreign governments and other investors own.   An actual default on government treasury interest payments would create havoc for the currency markets and hundreds of billions of United States debt securities that are traded daily and weekly.  Since this would make those buying United States securities consider our debt as having a higher risk quotient than normal, those purchasing it would want to get paid more to purchase the same securities, translating into higher yields for treasuries.   That means our government would have to pay higher rates of interest to borrow money from the outside world.  As the rates that these securities pay affect overall interest rates on all securities, loans, mortgages, car loans/leases, and other like obligations, that means a mortgage on a home that would have been at 5 to 6% would most likely be at 8 to 10% or even higher.  Since many Americans have jumbo loans due to higher real estate prices in the last couple of years, this would translate into double-digit borrowing rates that will be catastrophic for the American home buyer/owner.   If that trend were to continue, real estate sales would slow greatly which would result in the price of real estate dropping, maybe somewhat dramatically.

The fallout to equity markets would have an impact greater than a market correct because the next fallout would come to banks and other financial institutions.   Think of this as the latest bank failures times two.  Such events would ruin the United States’ credit rating around the world and devalue our currency as well.    If that is not bad enough, Medicaid and Medicare benefits, government pension payments, and social security benefits could cease.   Estimates based on the 2020 census show that over sixty million (60,000,000) Americans are on social security of some sort.   That’s a very large percentage of the population of the United States.

Now you wonder if it is so dire, why all the hullabaloo, right? Just raise the limit and call it a day right? The arguments regarding how to handle the debt limit are as old as the actual difference between Republicans and Democrats.   Republicans are against raising the Debt Limit because fundamentally that is against their ideology of government being too big and spending widely with little to no controls. While the Democrats view spending as a necessary thing under the guise of “making lives better”.   They have used the Debt Limit as a catch-all to attempt to include programs that would assist their own ideas of how the government should be larger and “help” people.

You can see how this issue has become a defining moment in American politics.  A deal has supposedly been reached between the parties to keep the government funded, of course, the question will be at what cost to our future.  Stayed tuned for more on our series on the Debt Ceiling or Floor as we are now calling it……