If you were wondering who is going to make the biggest comeback in 2017, I can tell you with certainty that it’s not the market after the March hikes, or healthcare reform, or NSYNC. Rather, the biggest comeback of 2017 will be the U.S. debt ceiling. You may remember when the U.S. government shutdown for roughly two weeks in 2013 due to disagreements in Congress on raising the debt ceiling. Arguments of raising the debt ceiling, in conjunction with the arrival at the fiscal cliff, caused a similar crisis in 2011. Aside from these two scenarios, Congress has typically raised the debt ceiling without question. In fact, since 1960, Congress has voted to raise the debt ceiling 78 times; this is a standard procedure in the US and is an important aspect to the economy and macroeconomics in general. So what exactly is the debt ceiling? The debt ceiling is simply a fancy metaphor for the amount of money that the US is authorized to borrow. Raising the debt ceiling does not allow for new spending, rather it simply allows the US to continue to finance programs and projects that have already been authorized. Some of these include things like social security, the military, Medicare, and servicing the existing debt. You may have noticed that the US has been incurring debt at a rather fast rate. In fact, the US will soon surpass a major milestone, as US debt will pass the $20 trillion mark later this year. In response to this rising debt, Congress must vote every couple years to raise the value of the debt ceiling. In past years, politicians have attempted to use the debt ceiling vote as political leverage for cutting government spending.
So what exactly happens if the debt ceiling isn’t raised? If you looked up “economic apocalypse” in the dictionary, it would say “see failure to raise the debt limit.” If Congress doesn’t raise the debt ceiling, then essentially the US would default on all of its debt—which would be catastrophic. Defaulting is when the borrower—the US government in this case—is unable to fulfill its legal obligation to pay back its debt to the lender—in this case the people who hold US securities, which are individual Americans, corporations, and foreign governments. This specific instance of defaulting, is called sovereign default.
While sovereign default isn’t entirely unheard of—as Jamaica defaulted in 2010 on $7.9 billion and Ecuador in 2008 on $3.2 billion—the economic ramifications of a default are rather harmful. In addition to the economy falling into a possible recession, the credit rating of the US can also decrease. While the S&P did downgrade the US’ credit rating in 2011 from AAA to AA+, a falling credit rating affects future borrowing, thereby making it tougher for a country that defaults to take out loans in the future.
So defaulting is pretty bad, but what are the chances? Considering the US’ current credit rating and its existence as a global economic hegemon, it is rather unlikely that the US will default on its loans. This is due to the fact that if Congress doesn’t raise the debt ceiling, then the world is likely to fall into an economic recession. While it is unlikely that the US will default on its debt, it is likely that we’ll have another debt ceiling controversy later this year.
If there are fractures within the Republican Party, as there was with the healthcare vote, Congress may look more like a MMA octagon rather than a legislative body come this fall.
The most recent legislation on the issue, known as the “Bipartisan Budget Act of 2015,” suspended the debt ceiling, but only until March 15, 2017. As of right now, the limit has been reinstated, and the US Treasury can no longer issue bonds in order to finance the US government. Currently, the US Treasury is taking “extraordinary measures to borrow additional funds without breaching the new debt ceiling.” These extraordinary measures are primarily suspending investments to different retirement and savings funds. Even with these measures in play, the US Treasury is likely to run out of cash before fall 2017. The US Treasury hemorrhaging of cash is sure to place pressure on Congress to raise the debt ceiling. While we are is unlikely to see similar controversies like in 2011 and 2013, there may be disputes over the stipulations in spending cuts following the debt limit increase. Republicans will most likely use their majority in Congress to leverage a decrease in spending and lower taxes. However, if the healthcare vote is indicative of the current political climate, garnering unequivocal support from the Republican Party may be easier said than done. As the Treasury runs out of money, it will be interesting to see how both Congress and President Trump react to the need to raise the debt limit. If there are fractures within the Republican Party, as there was with the healthcare vote, Congress may look more like a MMA octagon rather than a legislative body come this fall.
Sources:
Amadeo, Kimberly. “Who Suffers If America Defaults on Its Debt.” The Balance. Accessed April 14, 2017. https://www.thebalance.com/u-s-debt-default-3306295.
“As Borrowing Authority Expires, Treasury Stops Issuing Debt.” USA TODAY. Accessed April 14, 2017. http://www.usatoday.com/story/news/politics/2017/03/16/borrowing-authority-expires-treasury-stops-issuing-debt/99266342/.
Bryan, Bob. “The US Government’s $19 Trillion Debt Isn’t a Problem.” Business Insider. Accessed April 14, 2017. http://www.businessinsider.com/us-government-19-trillion-debt-not-a-problem-2016-4.
Congressional Budget Office. Federal Debt and Statutory Limit March 2017. Accessed April 14, 2017. https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52465-federaldebtlimit.pdf.
“Debt Ceiling Fight May Be Too Tempting for Trump to Pass Up.” Bloomberg.com, March 14, 2017. https://www.bloomberg.com/politics/articles/2017-03-14/debt-ceiling-fight-may-be-too-tempting-for-trump-to-pass-up.
“Debt Limit.” Accessed April 14, 2017. https://www.treasury.gov/initiatives/Pages/debtlimit.aspx.
“Full Faith And Credit.” Investopedia, February 27, 2008. http://www.investopedia.com/terms/f/full-faith-credit.asp.
Puzzanghera, Jim. “The U.S. Hit Its Debt Limit Again. Now the Treasury Department Is Maneuvering to Avoid a Default until Congress Acts.” Los Angeles Times, March 16, 2017. http://www.latimes.com/business/la-fi-debt-limit-trump-20170316-story.html.
Schoen, John W. “Remember the Debt Ceiling? Here It Comes Again.” CNBC, February 17, 2017. http://www.cnbc.com/2017/02/17/remember-the-debt-ceiling-here-it-comes-again.html.
Staff, Investopedia. “Default.” Investopedia, November 23, 2003. http://www.investopedia.com/terms/d/default2.asp.
“What Are the National Debt, Debt Ceiling and Budget Deficit?” US News & World Report. Accessed April 14, 2017. https://www.usnews.com/news/economy/articles/2017-04-13/what-are-the-national-debt-debt-ceiling-and-budget-deficit.