The Debt Ceiling Hostage Crisis
iStock Getty Images. Capital Dome, Washington DC.
The Debt Ceiling Hostage Situation
A hostage situation? Really? That seems a bit extreme describing the debt ceiling crisis.
First, there is no crisis. The debt ceiling will be passed. I’m guessing on May 31st when the clock strikes midnight, Congress and the President will come to a miraculous conception.
Congress is holding the debt ceiling up for ransom. Demanding that spending be cut while they know that the debt ceiling isn’t about new spending. The debt ceiling represents money that has been previously budgeted, approved and spent.
They also know that under the previous administration the debt ceiling was raised without ANY demands or concessions.
But I digress.
History tells us that every President since Dwight Eisenhower ( about 64 years ) has raised the debt ceiling. Every President, regardless of their party.
Starting with Eisenhower there have been seven Republican Presidents and six Democrats including Biden.
History also tells us that since the beginning of 1959 the debt ceiling has been lifted eighty-nine times. Regardless of who is in power.
Curiosity got the better of me and I had to look at the data a little more closely.
Presidents have raised the debt ceiling frequently. Ronald Regan wins in this category. He raised the debt ceiling eighteen times. During his two terms as President, he increased the debt ceiling by 186%.
His motto was “Spend, spend, spend”.
Presidents who served two terms tended to lift the debt ceiling more often. Well that makes sense.
The big spenders were:
George W. Bush increased the debt ceiling by 101%. He lifted the debt ceiling seven times.
Barack Obama increased the debt ceiling by 74%. He lifted the debt ceiling eight times.
Using wonky math I will say that the average for Bush was an increase of 50% per term and for Obama an increase of 37% per term.
Bill Clinton over two terms increased the debt by 32%, or 16% per term.
Donald Trump increased the debt over one term by 33%.
I have included at the end of this article a great chart from the Peter G. Peterson Foundation showing how many times each President raised the debt ceiling, the year, and the controlling party in Congress.
What do I make of the data?
Overall it is fairly bipartisan.
It is the job of Congress to make raising the debt ceiling happen. Without all the drama, without the “negotiations” and without holding the debt ceiling for ransom.
As my brother Erich used to say, raising the debt ceiling should be “no big whoop.”
The second half of this article is how the debt ceiling plays a role in our daily lives.
Most of us have debt. If I buy a car and finance it, I have a monthly payment that is part principal and part interest. The interest rate matters when I need to calculate how much I can afford. I have borrowed money (debt) to buy the car. How much debt do I have?
Depends on the price of the car.
If I buy a home I need to get approval from a bank or lending institution to borrow a considerable sum of money. Buying a home means paying a monthly amount that includes principal and interest. The amount of interest I must pay makes a significant difference in the size of the monthly payment. The money I owe the bank is a BIG debt.
If I fail to make my payments on time I am in “default” on my loans. The lender can repossess the car or foreclose on the house.
If I have credit card debt my monthly payment includes principal and interest. The minimum amount due is typically the amount of interest.
In all three cases I am paying different rates of interest on my debt . Another term for interest rate payments is called “servicing the debt.”
This is what debt looks like from an individual perspective. Once I borrow I am expected to make my interest and principal payments on time.
If I borrow too much, relative to my income, my credit rating will go down.
An individual credit rating is about more than paying on time. A credit rating includes how much total debt I owe. If my credit rating goes down, the next time I need to borrow, the interest rate I will have to pay goes up. As my credit rating goes down, I become a bigger risk to the lender. There is a chance that I have too much debt and won’t be able to pay the debt off.
Now let’s flip the switch. The government borrows money to pay for spending that has been approved by Congress through a budget process.
Spending includes:
- Mandatory spending – funding for Social Security, Medicare, veterans’ benefits, and other spending required by law. This typically uses over half of all funding.
- Discretionary spending – federal agency funding. Congress sets funding levels for these each year. This usually accounts for around a third of all funding.
- Interest on the debt – this usually uses less than 10 percent of all funding.
The government pays for spending through tax revenue(income). If there isn’t enough tax revenue to cover spending costs we have a deficit.
One way the government can raise additional money is by issuing debt.
Issuing debt at the government level means selling bonds.
I am an investor. I want a safe place to invest, and I choose to buy Treasury bonds. When I buy a Treasury bond, I have an agreement with the government that says,
“I, the government, promise to pay you an interest rate of 5% for one year if you buy a bond for $1,000.00 [1].
At the end of one year I, the government, will give you back the money I borrowed from you, $1,000.00 plus $50.00 in interest.”
The government, the borrower in this example has the highest credit rating possible. It would be the same as an individual having a credit score of 850. With a score of 850 I am not considered a credit risk and it is easy for me to borrow money.
Because US Treasury bonds have the highest possible rating, investors around the world are willing to lend the US Treasury money ( buying Treasury bonds) because they know they will get their money back plus interest.
If the debt ceiling is NOT lifted, and the Treasury cannot pay bond holders their interest payments this is considered a “default.” The credit rating of US Treasuries drops and investors around the world are holding debt that is now worth less than before, (but not worthless).
In addition to bondholders taking a hit and the credibility of US Treasuries in question, the government could in addition suspend Social Security payments or payments to veterans.
Essentially when the government withholds payments, spending drops. When spending drops GDP falls and unemployment rises, When GDP falls and unemployment rises the economy faces a recession, the very thing the Fed has been trying to avoid for the last 18 months.
Nothing good comes from not raising the debt ceiling. Nothing. Congress knows that and if they don’t they should.
It is the job of Congress to make this happen, regardless of the party in the White House.
Debt Limit | U.S. Department of the Treasury
National Deficit | U.S. Treasury Fiscal Data
Infographic: The Debt Ceiling (pgpf.org)
The federal budget process | USAGov
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