Why the U.S. is closing in on both a debt default and a government shutdown.
Topics covered include:
- How a government shutdown differs from a debt ceiling crisis
- Why hasn’t Congress passed legislation to fund the government and raise the debt limit
- How refusing the raise the debt ceiling could impact Social Security
- How big is the national debt and who owns it
- Why we never know how much federal debt is too much: Japan vs the U.S.
- How federal debt is used and how it has led to financial innovation
- Why countries default on their debt
- What are some of the challenges with central banks pegging interest rates and monetizing the debt
- What could cause the U.S. dollar to crash and inflation to soar
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is Episode 360. It’s titled, “Will the U.S. Default? The Debt Ceiling, Government Shutdowns, and the National Debt.”
The U.S. is in the midst of its periodic circus, theatrics as it relates to the debt ceiling and a potential government shutdown. The Economist newspaper calls the debt ceiling issue, “The most bizarre of economic spectacles. A ritualistic threat of economic self-harm”. They continue, “In the name of fiscal responsibility, the world’s biggest economy is flirting with an act of brazen irresponsibility: a sovereign default.”
Two things are going on currently right now. If you see the news, you see talk of government shutdowns, talk of debt ceiling potential default. The debt ceiling issue is separate from a potential government shutdown related to the fiscal 2022 budget.
The Fiscal Budget
The U.S.’s current fiscal year ends at midnight, this Thursday, September 30, 2021. Without additional funding, many government functions will be shut down; museums and national parks will close, many federal workers won’t get paid; about three out of five workers. The last government shutdown was in January 2019, it lasted 35 days, and it seemed like it was never going to end until air traffic controllers, who were deemed essential workers, were working without pay, started calling in sick. That led to flight delays and ultimately, an agreement to fund the government. That’s what Congress is supposed to do, to fund the government. Now, oftentimes, they don’t have a new fiscal budget passed by October 1st, but they can pass what’s known as a continuing resolution, to continue to fund the government. They have not done so yet.
The Debt Ceiling
The second issue is the debt ceiling. The debt ceiling is the legal cap that Congress sets on the amount of borrowing that the government can do, the amount of Treasury notes and bonds issued by the U.S. Treasury. The first overarching debt ceiling was put in place in 1917. Prior to that, debt was authorized by Congress, but for specific purposes. The debt ceiling has been raised 78 times since 1960; 49 times under Republican presidents and 29 times under Democratic presidents. The debt ceiling was raised on a bipartisan basis three times under the Trump administration. But now, Republicans, at least yet, have been unwilling to raise the debt ceiling under a Biden Administration.
Because Congress authorizes spending and those spending amounts exceed the amount of tax revenue raised, that leads to budget deficits, and that budget deficit, every year, leads to additional Treasury bond and note issuance to fund that gap.
Treasury Secretary Janet Yellen said that if the debt ceiling is not raised, that the government will run out of cash (the U.S. Treasury) to pay interest to redeem maturing government bonds, by October 18th.
Again, this is separate from the fiscal 2022 budget. That has to do with authorization to spend. The debt ceiling has to do with actually having money to spend. Speaking of the mid-October date, Janet Yellen said, “A default would be a catastrophic event for the economy.” At that point, we expect Treasury would be left with very limited resources, that would be depleted quickly. It’s uncertain whether we could continue to meet all the nation’s commitments after that date, including payment of social security benefits, which we’ll take a closer look at later in this episode.
Now, where are we currently? The House of Representatives, where the Democrats have a majority, approved a stopgap measure, a continuing resolution to fund the government through December 3, 2021, with the idea that by then an actual budget could be passed, and spending amounts. And the legislation suspended the debt limit through December 16, 2022. Democrats in the Senate sought to pass similar legislation, but Senate Republicans blocked it. In the Senate, most legislation needs 60 votes, a supermajority, in order to move forward to a final vote. It’s a procedural issue that keeps many bills from actually being read in a final vote. The Democrats have a slim majority in the Senate, but they need at least 10 Republicans to join in order to move forward with a given piece of legislation.
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