Today we are targeted to approach the Debt Ceiling. Think of the Debt Ceiling as hitting the maximum on your credit card limit. For the Federal Government, that maximum is $31.4 trillion. If the US Government goes above that maximum – it goes into default. Just so you know, the government has never defaulted on its obligations so that is a BIG deal!
- If the government defaulted it would mean they couldn’t pay their obligations like social security or Medicare.
- A default could also trigger higher interest rates, a drop in stocks and more economic distress…like a recession.
- The last time we hit the Debt Ceiling was in 2011 and it took months for the economy to recover – the markets significantly declined, and the federal government’s credit rating was downgraded.
- A possible solution that has been used before is to lift or suspend the borrowing cap – essentially raising the ceiling or maximum. o Historically this has been done in tandem with significant spending cuts.
- So, what actually happens if we hit the debt ceiling? Here are some potential outcomes:
- The Treasury will have to move money around to cover the shortfall in cash flow. This is a temporary measure.
- Think when you have a large bill to pay, and you use money tagged for other expenses to pay this large looming bill. You still must pay your other debts at some point.
- Implement a spending cap instead of raising the debt ceiling – essentially trimming expenses.
- #Mintingthecoin – This idea has been around since 2011 and refers to a decades old law that allows the Treasury to mint commemorative platinum coins of any denomination. In this case, literally printing a coin worth a trillion dollars and depositing ‘the coin’ at the Fed so they can pay bills.
- Both Treasury Secretary Janet Yellen and President Joe Biden have dismissed this idea as a ‘gimmick’
- The Treasury will have to move money around to cover the shortfall in cash flow. This is a temporary measure.