U.S. Debt Ceiling: How much is too much?
The debt ceiling is nothing more than a fake upper limit on how much national debt can be issued.
Secretary of the Treasury, Janet Yellen, wrote a letter to the congressional leadership to send some bad news, stating:
If Congress does not pass new legislation to increase the debt ceiling the United States will default on their debt by early June.
This may sound like bad news (& it is), but looking back in time, Congress has raised the debt ceiling 89 times.
If the US defaults on their debt there would be a complete financial collapse.
In this case, no matter which side of the political continuum you stand by – everyone has aligned interests in ensuring trust and faith in the financial institution (similar to why SVBs deposit over the $250k FDIC insurance we’re backed by the Fed).
It is not just my opinion but the opinion of other economists that not raising the debt ceiling would be a horrible idea (& unconstitutional) take it from the White House:
“While policy makers have thus far, in the long history of our Nation, avoided inflicting such damage on the American and even global economies, virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions. Economists may not agree on much, but when it comes to the magnitude of risks invoked by closely approaching or breaching the debt ceiling, we share this deeply troubling consensus. ”
Or longtime Fed Chair Alan Greenspan who said:
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
But I don’t have a question on whether they will raise the debt ceiling, because they will (even if congress can’t agree before they exhaust all capital, the President could use his 14th amendment and the Treasury can step in to sell assets to help save the day).
Rather:
I wonder, two things:
Why does the debt ceiling exist?
How much more debt can we continue to take on?
The debt ceiling existing reminds me of daylight savings time.
Dating back to 1895 & taking off in World War I, we used daylight savings as a way to conserve electricity back in the second industrial revolution.
We’re doing something a certain way today because that’s how it’s always been done, not because it’s the best way to do something.
World War I also gave birth to the debt ceiling, which was put in place by Congress to give the U.S. Treasury more freedom to spend.
Today, the debt ceiling is more of a political weaponization tool resulting in grandstanding for fiscal responsibility versus legislation imperative to continued economic growth.
This leads me to my second question, which I think is more intriguing.
What is the limit of debt that the U.S. can take on?
Warren Buffett made a comment at an investor conference stating:
“The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”
This goes to say that in our current fiat monetary system, there is no upper constraint in terms of debt we can acquire because the government’s balance sheet is fundamentally different from U.S. consumer balance sheets.
The government can authorize the printing of money. Meaning, they can create money out of thin air to pay for their debts. U.S. consumers, on the other hand, do not have a money printer and have to maintain their budgets a little differently.
The government's true solvency constraint is inflation. The American people’s true constraint is solvency.
This isn’t to say there isn’t a max spending capacity (there is) but that number specifically is more uncertain.
Since there isn’t hard mathematics to justify the perfect amount of spending, we get pushed into the realm of Modern Monetary Theory (MMT), which hinges upon the idea of full employment and price stability.
MMT proponents argue that the government's deficit is our surplus (often communicated as, their red ink is our black ink).
This also means that when the government spends more than it collects in taxes, the deficit in spending is created for the private sector (non-governmental for profit and not-for-profit businesses) in the form of government bonds.
This is a liability to the government but an asset to the private sector .
So if the government were to decide to pay off the national debt, they would inadvertently eliminate an asset of the private financial sector & with investment being the backbone of the private sector equity, this would considerably slow down economic growth.
Proponents of MMT further argue that as long spending is met with adequate resources (equipment, man power, natural resources, etc.) then spending is stimulating the economy and as long as the capital is effectively used then there is little inflation.
If spending is not spent wisely there is a very real possibility that increased spending will result in higher inflation (as capital can not easily be absorbed through productivity and current resources).
The reason why the deficit is so high & the government can spend so much money is because the private sector generates trillions of dollars in revenue and can absorb the higher spending through efficiently using its current resources.
If you spend more money than you can effectively redistribute, inflation occurs.
I would then go on to speculate that as long as the American economy maintains the ability to absorb spending through productivity and efficiently using its current resources that we maintain a continued growing deficit but also a growing economy with a healthy level of inflation.
Open to feedback and rebuttal :)