Is The Sky Falling, or Is That Just The Debt Ceiling?
September 28, 2021
By Stephen Tally
The “debt ceiling” story continues to resurface and cause agitation; if not with the markets, then certainly with investors. One would think that we, the US taxpayer, would be more accustomed to the theatrics of the debt ceiling banter by now. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. But its history goes well beyond 1960.
During World War I, Congress sought to provide more flexibility in financing the war effort, and the Liberty Bond Actwas launched, with $1.9 billion in bonds issued at 3.5% in April of 1917. The second Liberty Loan followed in October with the issuance of $3.8 billion at 4%, 1918 brought the third loan issuance of $4.1 billion at 4.15%, and the fourth totaled $6.9 billion at 4.25%.
Two things come to mind here – the government is an old hat when it comes to borrowing, and I’d sure like to see my bond portfolio yielding 4%!
Now that we have a bit of history under our belt let’s address the present-day investor’s question. What does the debt ceiling mean, and what implications does it have on the economy? Better known as debt limit, the limit is the amount of money that the United States government is authorized to borrow to meet its obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
What it doesn’t do is authorize new spending commitments. It would be a bit disingenuous to that say since it prohibits new spending, it doesn’t matter. It does. As mentioned above, delays in benefits or payrolls do have negative impacts (although the thought of a politician missing a paycheck might not offend many). There could be opportunity costs of not having budgetary room to issue debt for a new program, or an unforeseen crisis could arise. The overriding concern would be the fallout of a US default and the economic ripples throughout global markets. After all, the US is still the world’s safe haven during an economic crisis, and markets are better for it.
Sounds dire, but is it? Default is a scary word, and there’s a lot to unpack when you envision America defaulting. Remember, though, the debt limit isn’t a new concept. Raising the limit is typically done promptly, with limited fanfare, and with little lasting economic effect. It’s only when divided parties dig in for political reasons that we’re cautioned of the impending doom of government shutdown and default. Mind you, essential government services continue during a shutdown, and the payment of the government’s obligations, debt, is an essential service. It’s also worth mentioning that when the government makes a payment on its existing debt, it reduces the total amount outstanding, making room under the debt ceiling. Both actions are at odds with default. The single most salient argument as to why “the sky is falling” mentality of a default lacks merit is the same reason the Federal government has a AAA rating – the ability to tax.
Article I, Section 8 of the Constitution states:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
And its companion, the 16th Amendment states:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
So long as the government’s ability to tax its citizens remains, talk of default is misleading.
Stephen Tally is the Chief Operation Officer at Leo Wealth and is based in the Dallas-Fort Worth area. Stephen is responsible for the firm’s ongoing operations and procedures as well as overseeing US compliance. He also specializes in wealth management and financial planning for individuals and small businesses.
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