Federal Debt Limit

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.

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. 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. Currently debt held by the public comprises roughly two-thirds of the total federal debt.

Obama debt ceiling crises

President Barack Obama voted against raising the debt ceiling in 2006. However, he later wanted to raise the debt ceiling to over twice its 2006 level. However, as Congress essentially deemed the Obama administration to be a serious credit risk, Obama did not get the debt ceiling increase he wanted. 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. But in February 2014, to avoid a public confrontation heavily weighted by the old media, many Congressional Republicans voted with Democrats to suspend the debt ceiling until March 2015 in hopes of winning back the Senate in November 2014.

The last increase in the debt ceiling occurred in February 2014 where the limit stood at $17.212 trillion. With large deficits emerging as baby boomers retire, some members of Congress expressed concern during the first debt ceiling crisis 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.” However, President Obama promptly ignored the Commission's recommendations.

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 first Obama debt crisis

After the failure of President Obama's Stimulus package, his entire White House economic team quit. 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 was 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

In 2011, the Obama deficits were 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"). 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.

In 2011, foreigners held $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.

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.

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.

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.

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.

Date	Amount of Debt	Sitting President	Date	Amount of Debt	Sitting President
December 1919	43.0 billion	Woodrow Wilson	September 1979	879.00 billion	Jimmy Carter
December 1939	45.0 billion	Franklin D. Roosevelt	June 1980	925.00 billion	Jimmy Carter
June 1940	49.0 billion	Franklin D. Roosevelt	December 1980	935.10 billion	Jimmy Carter
February 1941	65.0 billion	Franklin D. Roosevelt	February 1981	985.00 billion	Ronald W. Reagan
March 1942	125.0 billion	Franklin D. Roosevelt	September 1981	1.080 trillion	Ronald W. Reagan
April 1943	210.0 billion	Franklin D. Roosevelt	September 1981	999.80 billion	Ronald W. Reagan
June 1944	260.0 billion	Franklin D. Roosevelt	June 1982	1.143 trillion	Ronald W. Reagan
April 1945	300.0 billion	Harry S. Truman	September 1982	1.290 trillion	Ronald W. Reagan
June 1946	275.0 billion	Harry S. Truman	May 1983	1.389 trillion	Ronald W. Reagan
August 1954	281.0 billion	Dwight D. Eisenhower	November 1983	1.490 trillion	Ronald W. Reagan
July 1956	278.0 billion	Dwight D. Eisenhower	May 1984	1.520 trillion	Ronald W. Reagan
February 1958	280.0 billion	Dwight D. Eisenhower	July 1984	1.573 trillion	Ronald W. Reagan
September 1958	288.0 billion	Dwight D. Eisenhower	October 1984	1.824 trillion	Ronald W. Reagan
June 1959	295.0 billion	Dwight D. Eisenhower	November 1985	1.904 trillion	Ronald W. Reagan
June 1960	293.0 billion	Dwight D. Eisenhower	December 1985	2.079 trillion	Ronald W. Reagan
June 1961	298.0 billion	John F. Kennedy	August 1986	2.111 trillion	Ronald W. Reagan
March 1962	300.0 billion	John F. Kennedy	October 1986	2.300 trillion	Ronald W. Reagan
July 1962	308.0 billion	John F. Kennedy	July 1987	2.320 trillion	Ronald W. Reagan
May 1963	309.0 billion	John F. Kennedy	August 1987	2.352 trillion	Ronald W. Reagan
November 1963	315.0 billion	Lyndon B. Johnson	September 1987	2.800 trillion	Ronald W. Reagan
June 1964	324.0 billion	Lyndon B. Johnson	August 1989	2.870 trillion	George H. W. Bush
June 1965	328.0 billion	Lyndon B. Johnson	November 1989	3.123 trillion	George H. W. Bush
June 1966	330.0 billion	Lyndon B. Johnson	October 1990	3.230 trillion	George H. W. Bush
March 1967	336.0 billion	Lyndon B. Johnson	November 1990	4.145 trillion	George H. W. Bush
June 1967	358.0 billion	Lyndon B. Johnson	April 1993	4.370 trillion	Bill Clinton
April 1969	377.0 billion	Richard M. Nixon	August 1993	4.900 trillion	Bill Clinton
June 1970	395.0 billion	Richard M. Nixon	March 1996	5.500 trillion	Bill Clinton
March 1971	430.0 billion	Richard M. Nixon	August 1997	5.950 trillion	Bill Clinton
March 1972	450.0 billion	Richard M. Nixon	June 2002	6.400 trillion	George W. Bush
October 1972	465.0 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	495.0 billion	Gerald Ford	March 2006	8.965 trillion	George W. Bush
February 1975	577.0 billion	Gerald Ford	September 2007	9.815 trillion	George W. Bush
November 1975	595.0 billion	Gerald Ford	July 2008	10.615 trillion	George W. Bush
March 1976	627.0 billion	Gerald Ford	October 2008	11.315 trillion	George W. Bush
June 1976	700.0 billion	Gerald Ford	February 2009	12.104 trillion	Barack Obama
October 1977	752.0 billion	Jimmy Carter	December 2009	12.394 trillion	Barack Obama
August 1978	798.0 billion	Jimmy Carter	February 2010	14.294 trillion	Barack Obama
April 1979	830.0 billion	Jimmy Carter	August 2011	14.694 trillion	Barack Obama
			September 2011	15.194 trillion	Barack Obama
			January 2012	16.394 trillion	Barack Obama
			February 2013	No limit	Barack Obama
			May 2013	16.737 trillion	Barack Obama
			October 2013	No limit	Barack Obama
			February 2014	17.212 trillion	Barack Obama
			February 2014	No limit till Mar '15	Barack Obama

See also

• Budget sequester

External links

• The Debt Limit:History and Recent Increases.
• Bureau of the Public Debt
• Public Debt to the Penny
• Department of the Treasury