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Hi Taylor
- Huge request: can you explain the debt ceiling without getting into
the politics of it? I just want to know what it is and how it works
without getting into a debate.
Hi Stephen - A man after my own heart! It's fun to learn things
without having to fight about it. I'd love to help out—the debt
limit is a strange, fascinating, problematic thing that more people
should understand since it turns into a hot-button issue every few
years.
In the most straightforward way, the debt ceiling is how much debt
our government is allowed to have. Theoretically, we can have as much
as we want (and at over $31 trillion, we have a whole lot of debt).
The Constitution says Congress needs to authorize any borrowing, and
so the debt limit was initially set up as a way to give the U.S. Treasury
more flexibility when it needed to borrow money, particularly during
wartime. As long as the debt didn't exceed ____, the Treasury could
borrow.
That means, originally, establishing a cap on our debt was meant to
make government finance a smoother operation. Obviously, that's not
how it always plays out anymore.
Because of the amount of debt we carry, the limit needs to be raised
all the time. Some years it's a formality that no one hears about;
other years, Congress makes it more of an issue and a negotiating
tool.
Two key factors that some people miss when talking about the debt
ceiling. First, the vote to raise the debt limit isn't a vote to spend
more money. The government passes massive spending budgets which force
us to borrow more; the debt ceiling then has to get raised to cover
the borrowing costs of the budget that was already passed. Anytime
the debt limit comes up for debate, it's in relation to spending that's
already been approved by Congress, sometimes years prior.
The second issue is that no one knows what will happen if the ceiling
doesn't get raised because it's never happened before. The fear is
that the U.S. would default on debts, not be able to pay bondholders,
and the ripple effect would shake the global economy. The U.S. could
also have our credit rating downgraded, which would make future borrowing
more expensive.
Government spending is a big issue. It will always be hotly debated
in Congress. The debt limit, while different than a spending limit,
is representative of the small government versus big government spending
argument. Since the Treasury can estimate a window when the debt limit
will be reached, it sets a tidy deadline for this debate, even if
raising the debt ceiling won't actually change our spending habits.
Hopefully, this makes things a little clearer. It's fun to learn the
history behind modern-day political spats—it makes it a lot easier
to make sense of the jargon you hear on the news. Thanks for the question,
Stephen! |
| Legal Disclaimer:
Information presented is for educational purposes only and is not
an offer or solicitation for the sale or purchase of any specific
securities, investments, or investment strategies. Investments involve
risk and, unless otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser and/or tax professional
before implementing any strategy discussed herein. To submit a question
to be answered in this column, please send it via email to Question@GoFarWithKovar.com,
or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.
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