Let’s see if we can break down the debt ceiling issue. So once upon a time, well, back in 1917, America bought the Virgin Islands for about $25 million in gold, Babe Ruth, at 22, was pitching for Boston, and the United States entered WWI. There were also some significant changes going on in D.C.
One of those changes concerned the issuance of federal debt.
Coming into 1917 the U.S. Treasury could only borrow money and/or issue debt only with very specific instructions from Congress. For example, to build the Panama Canal, funding was required. Congress would pass a law or resolution authorizing a specific debt device for a specific amount for a specific period of time. Up to this point, Congress had the power of the purse and took its responsibility very seriously.
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With America’s entry into WWI, Congress determined the Treasury needed more flexibility in order to best fund the war effort. They passed the Second Liberty Bond Act of 1917. This act authorized the Treasury to issue debt in whatever length or form it saw fit so long as the total debt does not exceed the authorized amount. The debt ceiling was born.
This set up a new system for funding the operation of the Government. Congress spent far less time dealing with the specifics of financing the spending it authorized. It no longer involved itself with the mechanics of debt issuance. Congress shifted its focus to spending rather than debt. This is important in understanding how we got here, now. Instead, under the new process, if Congress spent too much, it simply had to raise the debt ceiling. This was where our current debt mess really got started.
A side note: The Biden administration is asserting that it does not need Congressional action to raise the debt ceiling. Biden says he will do it himself. The administration’s argument for taking action unilaterally is; under the 14 th Amendment, specifically section 4 which says in part:
, “…The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
But if this part of the 14th Amendment, “…public debt… shall not be questioned…”, somehow conveys authority over spending and the budget to the Executive Branch, then how is removing control of spending, deficit and debt from the purview of Congress not a violation of separation of powers? Why has it not been done in over a hundred years? There have been a lot of confrontations about the debt ceiling before. Can you say posturing? Or do we now have an elected dictator? Just asking…
Now, let’s move forward in time to last year. Our Democrat controlled 117th Congress authorized a massive amount of deficit spending. They authorized spending on all sorts of things. The issue now is the spending authorized last year takes us past the debt ceiling already in place.
The 117th Congress year exceeded the debt limit. They knew they exceeded the debt limit. They knew it before authorizing the spending. But they authorized the spending anyway. They also went home knowing they had done nothing to remedy the issue they created. They left the mess for the next Congress, the 118 th, to clean up. The question is what are you as a voter going to do about this act of irresponsibility?
Let’s be clear. If we were budgeting, which we really aren’t, we would have known and debated whether to raise taxes to cover the shortfall, raise the debt ceiling ($31.4 trillion), or perhaps we might have even spent less… but we didn’t.
The process currently in use is called budgeting but it does not follow budgetary constraints. It simply authorizes spending. There is no corresponding requirement to actually pay for it in the same period the spending occurs. But we did none of those budgetary type things. Instead, the 117 th simply passed the buck to the next Congress, the 118th. You can decide if this is the responsible thing to do but it is how we got here.
If the debt ceiling does not get raised by Congress by about June 1st, or if there aren’t budget cuts which prevent us from hitting the debt, ceiling the Federal Government will default on some of its debt. So what? What is its significance? Why should you care?
Well, the consensus is this would be bad but how bad and more importantly, how bad for whom? Let’s look at the history of what has happened when other countries have defaulted. What we see are things like spikes in interest rates, dips and crashes in the stock markets and thing like recessions or recessions’ big brother, depressions.
There are two basic arguments about what to do to resolve the situation America finds itself in. Mr. Biden et al are arguing Congress has already authorized these expenses. So all of you Republicans need to knock off the male bovine excrement and just cover our a$$es: Raise the debt ceiling.
The Republican leadership is going to decline. Their position is essentially there was an election which we won and we won because the American people want us to stop with the crazy spending. They told us to stop the insane deficits and bring down the national debt. It does not matter that the old Congress authorized the spending. They could have been responsible and paid for the spending they authorized… But they didn’t. It is time to renegotiate the spending or to make a deal we can live with about future spending.
America has a $31.4 national debt. That insult is compounded with each additional follow on deficit spending. This same kabuki dance has been going on for decades. When exactly do we pay down the debt? Why are we spending upwards of $1.0 trillion in interest to service the debt? Wouldn’t the money be better spent on buying more goods and services for the people of the country?
America has not had a budget surplus in 22 years according to the U.S. Treasury. When are we going to balance the budget? You cannot pay down the debt if you don’t balance the debt first. No more deficits. Stop overspending.
There are people who think we don’t need to pay down the debt. When you have a lot of debt and interest rates go up you have a harder time paying for what you borrowed. You are left with no choice but to cut spending in non-debt service areas.
Do a little thought experiment with me: Let’s assume you owe $300,000 on a variable rate mortgage. You borrowed the $300,000 when the interest rate was 0% for a period of 30 years. That means, when you borrowed it you would have been responsible for making amortized principal only monthly payments of $833.33. So, as long as you could afford the monthly payments you were sitting pretty.
Now let’s say the interest rates go up to 2%. That would cause your payments to rise to $1,108.86 . So, to make the increased payments you have to come up with an additional $275.53 monthly, an increase of about 33%. Maybe you give up that vacation or maybe it means eating out less. There is some pain there but you still get by.
Then interest rates go up to 5%. What happens then? The monthly payment goes up to $1,610.46. So to make the increased monthly payment, now you have to come up with an extra $777.13, an increase of 93.25% over your original payment.
Then the interest rate goes up to 9%. Now your monthly payment goes to $2,413.87. Now to make the increased monthly payment, you must come up with an extra $1,580.54 monthly, an increase of about 190% over your original payment.
Then interest rates go to 15%, the monthly payment goes to $3,793.33. Now to make the increased monthly payment, you have to come up with an extra $2,690 monthly, an increase of about 355% over your original payment. What happens then?
You will get a second job. Maybe you will turn down the thermostat. You will be eating rice and beans and for variety you’ll eat beans and rice. You are going to go broke. You probably lose the house. Somehow you must get out from under the debt.
The higher the interest rates go the harder time you will have paying the interest on the debt. At some point the interest on the debt breaks you.
This same thing that happens to you holds true for a country with a lot of debt. Debt is not a problem. The problem is seldom the repayment of the principal. The struggle is the payments required to service the interest. Unlike you and me, America cannot simply declare bankruptcy. As our interest rates are going up, our debt is becoming more expensive to hold. America is playing with fire.
Sure, there is a point to be made that Congress authorized the spending. But when it did so, it authorized the Executive Branch to break the law that Congress made and has been on the books since 1917. That’s what they did when Congress authorized spending money we did not have and could not borrow. The Treasury then could not spend in excess of the debt ceiling and it cannot do so now… unless it changes the law… which it writes… but the last Congress did not do that… and it is gone.
There is not now and there never has been an expectation that one Congress could bind the hands of any future Congress. That authority does not exist. Any law a Congress of men can make a Congress of men can repeal. That is the standard.
America’s debt is now riskier in the eyes of everyone around the world. This is because of what we did to Russia last year. The problem coming is, our debt is seen as riskier. Interest rates are rising. Fewer countries are willing to buy our debt offerings. And in a time when there are fewer buyers with rising interest rates we are borrowing more. These things will mean rates will be higher than they might otherwise have been.
Up until now we’ve always just continued with business as usual, raised the debt ceiling and it was no big deal. But things are different this time. With debt already as high as we can afford to pay for and interest rates continuing to rise we may find the breaking point.
