In 1917, Congress created the first debt ceiling with the Second Liberty Bond Act. While renamed and revised numerous times since, a debt ceiling has remained a fixture in government spending.
The debt ceiling is a legislative limit on the amount of national debt that can be issued by the US Treasury. It includes issued debt held by the public (such as Treasury bonds), and intergovernmental holdings (which the government essentially owes to itself or owes in benefits).
Since the US government continually spends more money than it brings in, the debt ceiling has been raised over and over. The current crisis stems from 2015, when Congress and the Obama administration suspended the debt ceiling entirely until March 15, 2017 with the Bipartisan Budget Act.
That day of reckoning has since passed, and the US government is living on borrowed time. It cannot incur any further debt until the ceiling is raised.
According to Forbes, the US national debt was $19.918 trillion dollars on March 16, 2017, and increasing by the second. The United States has reached its statutory spending limit. Only a new debt ceiling agreement or another suspension can make the wheels of government finance turn again.
On March 16, Treasury Secretary Steven Mnuchin implemented “extraordinary measures” to keep the government running. This temporary financial shuffling can only last until the money runs out this fall, or perhaps even sooner.
The US Treasury now has less cash on hand than Apple or Google.
To avert economic disaster, Congress and the President must reach a new debt ceiling agreement before the remaining money runs out. But if the recent healthcare disagreements are any indication, serious trouble may lie ahead.
So what happens if Trump and Congress can’t reach an agreement before the US Treasury runs out of cash?
In a word, disaster.
Without available cash, the Treasury will have no money to pay its creditors, citizens, or financial obligations. US credit ratings would suffer, leading to increased borrowing costs as investors seek to offset risk. Financial markets would be in turmoil, and the dollar could lose its standing as a stable global currency. Economies around the world could be at stake if a US default occurs.
In the 2017 Long-Term Budget Outlook issued March 30, the CBO revised their forecast upward for U.S. federal debt-relative-to-GDP – predicting a staggering 150% increase.
As you can see, this chart clearly highlights the soaring U.S. debt load, exploding from 77% of GDP in 2017 to 150%+
The Congressional Budget Office says their analysis of high and rising debt in the U.S. will have serious budgetary and economic consequences.
What does this mean for you?
The day of reckoning is quickly approaching, especially as more and more sovereign debt is offloaded.
Bloomberg recently warned America’s biggest creditors are dumping treasuries at record levels.
Now a perfect storm is brewing that might stop Congress from giving Mnuchin what he wants.
Democrats are now talking about holding the debt ceiling hostage unless Republicans agree to investigate President Trump’s relationship with Russia. Democratic Senator Chris Coons told MSNBC last month that obstructing the debt ceiling is on the table.
And if Congress fails to lift the limit now, the Bipartisan Policy Center projects the government will only stay solvent until August 2017.
That’s only 140 days away and will leave some very hard decisions for Secretary Mnuchin.
That’s why investors need to pay close attention to the debt ceiling fight in Congress right now and make sure they are diversified.
Share this post
- Tags: debt