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The Perpetual Crisis (a.k.a. The Debt Ceiling) Thumbnail

The Perpetual Crisis (a.k.a. The Debt Ceiling)

It's that time of year again...the time when politicians gather around to debate a monster of their own creation: the need to raise the debt ceiling.

Given that the debt ceiling is in the headlines again, I thought I would share a few thoughts about the topic and discuss the insanity of it all. We'll start by defining what the debt ceiling is, share the brief origin story, explain why it's a perpetual crisis, and finish with what we might do about it.

What is the Debt Ceiling

According to the Department of the Treasury, 

"The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments."

Ok, that's pretty straightforward.

Now for a Brief History of Government Debt and the Debt Ceiling 

Since our country's infancy, the U.S. has maintained some level of debt[1], but the structure and rules have changed over the years. From the early days through WWI, Congress had strict control over federal borrowing. Beyond authorizing all debt issued, they also defined the terms and instruments to be used by the Treasury. 

This changed with the introduction of the debt ceiling in 1917 as it provided the Treasury with much more latitude in purpose, terms, and the instruments to be used.

The debt ceiling worked quite well in terms of fiscal restraint until 1974 when Congress passed the Congressional Budget and Impoundment Control Act, which created the congressional budget process. The intent of this act was to give Congress tools to restrict spending by the executive branch, but it's this budgetary process that introduced the annual crisis which is the debt ceiling.

The Perpetual Debt Ceiling Crisis 

Here's how the debt ceiling works in practice: Except for during times of emergency (e.g., COVID), there is an existing debt ceiling in place at all times. Congress obviously knows the current limit since they're in charge of setting this limit. 

But then Congress will pass a budget with a significant deficit (where spending exceeds revenues). Not surprisingly, this budget will inevitably cause the debt to balloon, thereby approaching the existing debt ceiling limitation.

When this happens, and we approach the point of defaulting on our debt (that's what this crisis is all about), politicians will then express a need for fiscal restraint only to succumb to the obvious raising of the debt ceiling once again. Then the cycle begins anew.

In other words, the debt ceiling is a self-imposed and self-perpetuating crisis that has occurred in some form 78 times since just 1960 alone. It's not fun, but politics never is.

What Are We to Do as Investors?

As far as what we should do about this from a financial planning perspective, the obvious answer is nothing because, just like most things, the debt ceiling and its ramifications are outside of our control. And given that we’ve been through this charade 78 times over the last 62 years, it seems likely that continuing to focus on our plan is our best course of action. 

Stay the course.

[1] The sole exception is 1835-1836