October 2 could be the “X” date–the day when the U.S. cannot meet all of its financial obligations. It depends on whether the U.S Treasury can make an $81 billion Military Retirement Trust Fund payment. We will have the money if the Congress says it’s okay to borrow more by raising the debt ceiling.
Where are we going? To the debt ceiling and good credit.
Why We Borrow
We need to borrow because government spending exceeds its revenue. On the first of every month Medicare and soldiers’ checks go out and then on the third of the month, it’s Social Security. Together, that’s maybe $71 billion. In addition, the government pays for submarines and highway maintenance and the President’s salary. Meanwhile, you know about the Military Retirement Fund and still there is much more.
Since tax revenue does not cover spending, borrowing covers the shortfall.
How We Borrow
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 $20 trillion in government securities?
Actually, we do. The bonds are held by the public and in government accounts. The U.S. government lends to itself when the Social Security trust fund or Medicare swap their 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. As of June, 2017, in a list of the 34 “Major Foreign Holders of Treasury Securities,” China was first, Japan, next and then Ireland, Brazil, and the Cayman Islands.
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 since then, 84 times, they have raised the debt limit.
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.
For some members of Congress, concern about the ceiling relates to a rising debt to GDP ratio:
What Happens Now?
On July 28, Treasury Secretary Steven Mnuchin sent a letter to Speaker of the House Paul Ryan. The letter said the Treasury will soon have to suspend necessary borrowing. Recognizing the gravity of the situation, he concluded his letter with…
“Based upon our available information, I believe that it is critical that Congress act to increase the nation’s borrowing authority by September 29, 2017. I urge Congress to act promptly on this important matter.”
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.
The U.S. has never ignored its “X” dates.
My sources and more: There are so many ways to look at the national debt. We can consider the current situation and see Steve Mnuchin’s letter. Then Pew and Brookings provided more insight and the CBO analyzed the numbers. You can also check the current foreign holders of the debt.
Please note that this entry is an updated version of past notes on the debt ceiling.