A Tutorial on the U.S. Debt Ceiling

If you fell into a coma in August of 2011 and woke up last night just before midnight in the East Coast, you would have seen the same images on television. That's because the debt ceiling was a major topic as America reached its borrowing limits again twice in the last two years and 18 times in the last two decades. And unless all Americans become billionaires over night and fork over half their income via taxes to the government, the debt ceiling will once again be a topic of discussion in January or February 2014 - just a few months away.

Just think about the resolution for a moment. A government was shut down for over two weeks, putting 800,000 government employees temporarily out of work, created massive uncertainty in the financial markets, triggered potential downgrades which would have raised interests for all, delayed discussions of potentially more important issues, decreased their GDP by an estimated one per cent, and put the nation on the brink of default just so they could fund the operations of its nation for an estimated twelve weeks. It is a joke of efficiency and policy that hampers America and the rest of the world.

Aside from Denmark, America is the only nation with a debt ceiling. It was created in 1917 to help fund efforts in World War One, and was set at double the national debt. Conversely, Denmark's debt limit policy started in the 1990's and was set at triple the national debt. It was reached in 2008. After a short, quick discussion, the country's politicians doubled the limit. Why? Because the limit was a stagnant line that did not take into account for inflation and raised it incredibly higher to make sure it was not an issue for decades.

A survey done by the University of Chicago back in January 2013 showed 84 per cent of economists agree or strongly agree that "a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes." Only three per cent expressed disagreement.

In fact, the debt ceiling is often considered the laughing stock of America, aside from all its other follies we love to poke fun. What's unusual about the debt ceiling is that the limit has a few loopholes, it should never become an issue. America actually borrowed $16.669 trillion back in May and has tapped into its safety valve using extreme measures to fund its country. But that sink is about to run out of cash. The quick and easiest way was to simply print money, literally, and some asked the government to print a $1 trillion coin, kind of like the Simpsons fictional trillion dollar bill.


However, such a maneuver would in theory devalue the dollar and raise inflation so high that it would cause more harm than good, but then again, it seems every economic theory in the book has been throw out the window over the last decade. Obama has said he is completely against the idea of printing money. You may argue that during his reign as the Chief, the Fed has always printed money, but this is inaccurate. The Federal Reserve purchases U.S. Treasury Bills, a debt-instrument, from its member banks using credit, not printed money, it created out of thin air. This helps spark demand for U.S. debt keeping interest rates in the nation low. As a result, the Federal Reserve, a part of America, owns $1.794 T of U.S. debt, and this leads us into the next topic.

There is a common saying that China owns America. Now, of course, nobody actually thinks China literally owns the country and all its land, but it stems from the notion that China has a lot of U.S. bonds on its books. But if we're using the logic of some radical political satire, then the real owner of America is Americans. Mind-blowing.

American government branches own about 25 per cent of U.S. bonds, Social Security owns $2.764 of that. China, just 7 per cent or $1.3T, less than the $1.794 owned by America's central bank. And Japan holds $1.1T of U.S. bonds and it is expected with the selling by the Chinese government, Japan will reclaim its spot as the number own foreign debt holder.

With America and SS holding so much of the bonds, this is why Obama nor any Republican would allow the nation to default, as it would hurt millions of Americans retired or ready to retire, and of course, those in office looking for re-election. So of course we all knew the bill would pass at the 11th hour. But why did it take so long? And why did 144 politicians publicly vote against a bill that would save the nation from default potentially creating a catastrophic economic collapse? Are they "mad like a hatter?" Maybe they know something we don't and are the most honourable warriors on Capitol Hill...

The political games brought on by the debt ceiling actually become popular when in 1995, Newt Gingrich, then the Republican leader of the House, repealed the Gephardt Rule, which granted the ceiling to be raised any time a bill was passed based on the spending that was authorized. But Gingrich realized it could be used as a "whip" to persuade politicians to make deals. And with Clinton at the helm of America, it could be used by a Republican House leader to bully a Democrat President. Enter the twilight zone.