Federal Debt Limit

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The unsustainable path of spending increases of the Pelosi-Reid and Obama era. Source:Federal Reserve Board

The Federal Debt Limit, commonly known as the debt ceiling, is the overall limit on federal government borrowing, as authorized by Congress. It is similar to an individual's credit card limit.

According to the Constitution, the Congress must approve all borrowings on behalf of the United States. Before the 20th century, Congress approved all bond issuances separately and explicitly. With the introduction of the debt ceiling, the treasury now had a line on which it could borrow as needed, without having to go back to Congress for borrowings under the ceiling. Raising the debt ceiling is not the same thing as spending more money, since spending is dictated by the Federal Budget, but it does allow the Federal Government to meet any existing financial obligations.

Contents

Components of the debt

Components of Federal Debt As Percentage of GDP FY1980-FY2007

There are two components to the national debt: the debt held by the public, and intra-governmental debt. The former is defined as the debt held by any individual or entity that is not the federal government, such as a mutual fund, individual investor, foreign government, or a municipal government.[1] Intra-governmental debt is debt the government owes itself, such as the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund. [2] Currently debt held by the public comprises roughly two-thirds of the total federal debt.

Obama debt ceiling crisis

President Barack Obama voted against raising the debt ceiling in 2006. However, he now wants to raise the debt ceiling to over twice its 2006 level. However, as Congress essentially deems the Obama administration to be a serious credit risk, Obama may not get the debt ceiling increase he wants. This is similar to a credit card company telling a person with either no income or little income who has maxed out on his credit card that he won't get a line increase and must pay off his card, lest he be sued. In fact, it is almost unheard of for a credit card company to give a credit line increase to someone who's maxed out on his credit card.

The last increase in the debt ceiling occurred in early 2010 and it was signed into law by President Obama on February 12, 2010, at which stage the limit stood at $14.294 trillion. With large deficits emerging as baby boomers retire, some members of Congress expressed concern over the government's dependence on borrowing to meet its obligations. President Obama responded by creating the National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Deficit Reduction Commission), which was charged with identifying “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”[3] However, President Obama promptly ignored the Commission's recommendations.[4]

The prospect of the Obama administration defaulting on its debt rose greatly when the Democrats insisted on raising taxes to cover their irresponsible spending habits. Obama refused to engage in negotiations, much like a deadbeat who refuses to answer the phone when the creditors are calling. Unfortunately for the world, Obama's personal irresponsibility will hurt many honest hard working people who have done nothing wrong.

Background to Obama debt crisis

After the failure of President Obama's Stimulus package,[5] his entire White House economic team quit.[6][7] During the next few years, the deficit was projected to fall somewhat, but if discretionary spending were to stay at the same level, the deficit would not fall enough under President Obama's economic policies to stabilize debt payments. Further, the debt is projected to begin rising more rapidly under Obama's policy because of the rising costs of Social Security, Medicare, and Medicaid.

Unsustainability of Obama deficits

The Obama deficits are currently more than half the size of total private savings. Even before President Obama's massive increase in deficits, the national savings rate was insufficient to finance job creation (or "domestic private investment").[8] To sustain large deficits, the economy would require a combination of more private saving (less consumption), lower investment (less job creation), and higher borrowing from abroad. The unsustainability of deficits tends to be triggered rapidly, as no investor wants to be the one still holding the government debt when eventual default or hyperinflation occurs.[9]

Foreigners currently hold $4.5 trillion (more than half) of the total privately held government debt. Foreigners are usually less willing to buy and hold government debt because they bear exchange-rate risk. Default or monetization typically leads to currency devaluation and would reduce the debt’s value in foreign currencies. If foreigners were to become less willing to finance the U.S. Government's operations, significantly higher interest rates would have to be paid by Americans. Now that some foreign governments hold large portfolios of U.S. Government debt, any particular government would have the incentive to sell its holdings before everyone else if it believes that the debt has become unsustainable. Furthermore, if interest rates and the cost of carrying the debt were to rise suddenly, higher debt payments to foreigners would result in a fall in Americans personal income as wealth is transferred abroad.[10]

Leaving the deficit at an unsustainable size retains the risk that the budget could at some point enter a debt spiral, in which the U.S. Treasury rates rose sharply and suddenly. The direct effect of higher interest rates stemming from greater credit risk would be to reduce the value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt reached $10 trillion at the end of FY2011, the wealth effect has become increasingly large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the financial crisis of 2008, financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.[11]

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower gross domestic product, and hence lower future national income, than would otherwise occur. [12]

History of the debt limit

The Second Liberty Bond Act of 1917, which helped finance the United States’ entry into World War I, allowed the U.S. Treasury to issue long-term Liberty Bonds marketed to the public to hold down the federal government's borrowing costs. The 1919 Victory Liberty Bond Act raised the maximum allowable federal debt to $43 billion, although the total outstanding federal debt at the time was only $25.5 billion.

In 1939, Congress eliminated separate limits on bonds and other types of debt, and created the first aggregate limit that covered nearly all public debt. This gave the Treasury freer rein to manage the federal debt as it saw fit. Thus, the Treasury could issue debt instruments with maturities that would reduce interest costs and minimize financial risks stemming from future interest rate changes. The debt limit then was $45 billion with total debt of $40.4 billion.

During World War II the debt ceiling was raised each year from 1941 through 1945, where it topped out at $300 billion. After the war, it was reduced to $275 billion. The Korean War was mostly financed by higher taxes rather than increased debt, and the limit remained at $275 billion until 1954. After 1954, the debt limit was reduced twice and increased seven times, until March 1962 when it again reached $300 billion, its level at the end of World War II.[13]

The United States debt ceiling has been raised approximately 84 times since the early 1900's. The table below gives details on the year, and the amount that the ceiling was raised. As seen below, many of the debt ceiling increases have been short term, contrary to Obama's position.

Year Amount of Debt Sitting President Year Amount of Debt Sitting President
December 1919 43.00 billion Woodrow Wilson September 1979 879.00 billion Jimmy Carter
December 1939 45.00 billion Franklin D. Roosevelt June 1980 925.00 billion Jimmy Carter
June 1940 49.00 billion Franklin D. Roosevelt December 1980 935.10 billion Jimmy Carter
February 1941 65.00 billion Franklin D. Roosevelt February 1981 985.00 billion Ronald W. Reagan
March 1942 125.00 billion Franklin D. Roosevelt September 1981 1.080 trillion Ronald W. Reagan
April 1943 210.00 billion Franklin D. Roosevelt September 1981 999.80 billion Ronald W. Reagan
June 1944 260.00 billion Franklin D. Roosevelt June 1982 1.143 trillion Ronald W. Reagan
April 1945 300.00 billion Harry S. Truman September 1982 1.290 trillion Ronald W. Reagan
June 1946 275.00 billion Harry S. Truman May 1983 1.389 trillion Ronald W. Reagan
August 1954 281.00 billion Dwight D. Eisenhower November 1983 1.490 trillion Ronald W. Reagan
July 1956 278.00 billion Dwight D. Eisenhower May 1984 1.520 trillion Ronald W. Reagan
February 1958 280.00 billion Dwight D. Eisenhower July 1984 1.573 trillion Ronald W. Reagan
September 1958 288.00 billion Dwight D. Eisenhower October 1984 1.824 trillion Ronald W. Reagan
June 1959 295.00 billion Dwight D. Eisenhower November 1985 1.904 trillion Ronald W. Reagan
June 1960 293.00 billion Dwight D. Eisenhower December 1985 2.079 trillion Ronald W. Reagan
June 1961 298.00 billion John F. Kennedy August 1986 2.111 trillion Ronald W. Reagan
March 1962 300.00 billion John F. Kennedy October 1986 2.300 trillion Ronald W. Reagan
July 1962 308.00 billion John F. Kennedy July 1987 2.320 trillion Ronald W. Reagan
May 1963 309.00 billion John F. Kennedy August 1987 2.352 trillion Ronald W. Reagan
November 1963 315.00 billion Lyndon B. Johnson September 1987 2.800 trillion Ronald W. Reagan
June 1964 324.00 billion Lyndon B. Johnson August 1989 2.870 trillion George H. W. Bush
June 1965 328.00 billion Lyndon B. Johnson November 1989 3.123 trillion George H. W. Bush
June 1966 330.00 billion Lyndon B. Johnson October 1990 3.230 trillion George H. W. Bush
March 1967 336.00 billion Lyndon B. Johnson November 1990 4.145 trillion George H. W. Bush
June 1967 358.00 billion Lyndon B. Johnson April 1993 4.370 trillion Bill Clinton
April 1969 377.00 billion Richard M. Nixon August 1993 4.900 trillion Bill Clinton
June 1970 395.00 billion Richard M. Nixon March 1996 5.500 trillion Bill Clinton
March 1971 430.00 billion Richard M. Nixon August 1997 5.950 trillion Bill Clinton
March 1972 450.00 billion Richard M. Nixon June 2002 6.400 trillion George W. Bush
October 1972 465.00 billion Richard M. Nixon May 2003 7.384 trillion George W. Bush
December 1973 475.7 billion Richard M. Nixon November 2004 8.184 trillion George W. Bush
June 1974 495.00 billion Gerald Ford March 2006 8.965 trillion George W. Bush
February 1975 577.00 billion Gerald Ford September 2007 9.815 trillion George W. Bush
November 1975 595.00 billion Gerald Ford July 2008 10.615 trillion George W. Bush
March 1976 627.00 billion Gerald Ford October 2008 11.315 trillion George W. Bush
June 1976 700.00 billion Gerald Ford February 2009 12.104 trillion Barack Obama
October 1977 752.00 billion Jimmy Carter December 2009 12.394 trillion Barack Obama
August 1978 798.00 billion Jimmy Carter February 2010 14.294 trillion Barack Obama
April 1979 830.00 billion Jimmy Carter
[14]

See also

External links

References

  1. http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit
  2. http://www.concordcoalition.org/issue-briefs/2011/0708/understanding-federal-debt-limit
  3. National Commission on Fiscal Responsibility and Reform, retrieved from http://www.fiscalcommission.gov , July 28, 2011.
  4. http://www.realclearpolitics.com/2011/06/23/cbo_quotwe_don039t_estimate_speechesquot_258038.html
  5. Obama’s Failure of Leadership, Eleanor Clift, Newsweek, 10/4/10.
  6. Summers latest member of Obama economic team to quit
  7. http://www.dailyfinance.com/2010/11/23/two-white-house-economic-advisers-to-quit/ More White House Economic Advisers to Step Down
  8. The Sustainability of the Federal Budget, Congressional Research Service, June 28, 2011, p. 2 pdf.
  9. The Sustainability of the Federal Budget, Congressional Research Service, June 28, 2011, p. 5 pdf.
  10. The Sustainability of the Federal Budget, Congressional Research Service, June 28, 2011, p. 10 pdf.
  11. The Sustainability of the Federal Budget, Congressional Research Service, June 28, 2011, pp. 11-12 pdf.
  12. The Sustainability of the Federal Budget, Congressional Research Service, June 28, 2011, p. 16 pdf.
  13. The Debt Limit: History and Recent Increases, Congressional Research Service, July 1, 2011, pdf pps. 9-10.
  14. http://usgovinfo.about.com/od/federalbudgetprocess/a/US-Debt-Ceiling-History.htm
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