An Update: What We Need to Know About the Debt Ceiling

Treasury Secretary Jack Lew just sent a letter to Speaker of the House John Boehner. The letter said we could soon have a $30 billion budgetary shortfall.

The reason? The U.S. spends as much as $60 billion a day on obligations that include Social Security payments, military salaries and Medicare expenses. However, by November 3rd, the Treasury will have less than $30 billion available to spend.

Borrowing what we need will solve the problem. But Congress likes to keep some control over how much we borrow.

And that is why Jack Lew wrote his letter. It is time for the Congress to give the Treasury permission to borrow more money.

Where are we going? To the debt ceiling and good credit.

You can see below that the Congress has raised the debt ceiling many times since 1990:

An Explanation

Discussing the debt ceiling, we should first take a look at the debt. Whenever the U.S. borrows, someone, somewhere buys a Treasury security such as a bond. The U.S. gets the money. The lender gets the bond–an IOU– and the promise that it will be repaid with interest (for most types of securities).

So who has close to $18 trillion in government securities?

Actually, we do. We owe approximately two-thirds of the debt to ourselves. The U.S. government lends to itself, for example, when the Social Security trust fund swaps its extra cash for bonds. In addition, individuals, businesses, state governments, local governments, pension funds–the list is long–buy U.S. Treasury securities.

The rest of the U.S. debt is held by foreign governments, businesses and citizens, with China and then Japan at the top of the list. Next is Caribbean Banking Centers, Oil Exporters, Brazil and then a long list with South Africa at the bottom for August 2015.

History

We have a debt ceiling because of a 1917 law. At the time, the Congress decided it was losing control of the volume of borrowing. To regain power over the federal purse and fiscal policy, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to raise the debt ceiling.

It sounds rather simple. But the politics have been unbelievable (actually believable). Repeatedly, different law makers have tried to attach conditions to debt ceiling legislation such as Social Security changes, bombing Cambodia, voluntary school prayer and even a nuclear freeze.

What Happens Now?

During February 2014, lawmakers avoided a political showdown by creating what they called a debt ceiling “extension.” Actually a sliding ceiling that would move upward, the extension stopped its ascent on March 15, 2015.

Since then, Jack Lew has sent nine letters to House Speaker Boehner saying, “I respectfully ask the Congress to raise the debt limit as soon as possible.” Awaiting their action, he has temporarily stopped issuing some bonds. Finally, his last letter on October 15 said you have to act now. This is the end of what I can do without a new ceiling.

Mr. Boehner has not yet replied.

Our Bottom Line: Good Credit

Our first Secretary of the Treasury Alexander Hamilton believed that a national debt, as long as it was manageable, was beneficial. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit. His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt.

It worked. Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.