November 2017

  • September 2017 Debt Ceiling Debate - Here We Go Again

    Debt Ceiling Debate – Here We Go Again

     

    “I’ve always depended on the kindness of strangers.”  So said Vivian Leigh in her role as Blanch in the Tennessee Williams play “A Streetcar Named Desire.”  Over the last 10 years, I have written several columns about the US debt ceiling debates.  Here we go again.

     

    In case you had not heard, the periodic silly debate over the debt ceiling is back again and will be a hot topic in September.  I say silly because the debt ceiling has become just another way for either side of Congress to impose economic terrorism with the other side, and all of us as well.  It has very little to do with getting anything done.

     

    The current national debt is just shy of $20 trillion dollars.  That’s a really big number.  Try writing that out on paper.  Each year that we run a budget deficit, we add the deficit to that number.  The current debt ceiling is just under $20 trillion and we are rapidly bumping up against it.  Hence the debate again on whether to raise the ceiling or not.

     

    Let’s step back for a moment and consider what the debt ceiling is.  The national debt total is simply the cumulative amount of spending that exceeded the amount taken in.  The ceiling is an arbitrary number agreed upon by Congress as a benchmark the treasury cannot exceed.  You might find it interesting to note that most countries do not have a debt ceiling.  However, it is our law and we have to deal with it.

     

    A statutorily imposed debt ceiling has been in effect since 1917 when the US Congress passed the Second Liberty Bond Act.  Before 1917 there was no debt ceiling in force, but there were parliamentary procedural limitations on the level of possible debt that could be held by government.

     

    US government indebtedness has been the norm in US financial history, as well as most Western European and North American countries, for the past 200 years.  The US has been in debt every year except for 1835.  Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly report on the amount of the debt ($75,463,476.52 on January 1, 1791).

     

    Every President since Herbert Hoover has added to the national debt expressed in absolute dollars.  The debt ceiling has been raised 76 times since 1962, including 18 times under Ronald Reagan, eight times under Bill Clinton, seven times under George W. Bush, and five times under Barack Obama.

     

    Yes, it is absolutely imperative that we deal with our accumulating national debt.  However, the debt ceiling is not the problem. The problem is the annual budget deficits.  It is important to remember that the amount of debt we have increases only if we spend more than we take in.

     

    Of course, that has been going on for a long time with annual budget deficits.  During the recent financial crisis of 2008 and for a couple years after, we had some years with over $1 trillion annual budget deficits.  This year will likely “only” be about $450 billion.  But that is like saying we are going over the cliff less rapidly.  The amount of debt is still going up.

     

    To put it in individual terms, if you had $100,000 worth of obligations this year and your income was only $80,000, you are going to need to find $20,000 somewhere.  You will either need to find additional income to make up the shortfall, take it from savings, or borrow the money, or default on some of the obligations.  If your personal debt ceiling is $100,000 and you can’t borrow anymore, and you can’t bring in additional income, you will default on what you owe.

     

    Is this the solution we are suggesting for the U.S government?  Where the debate should be concentrated is on balancing the budget.  Unless we start spending less than we take in, the debt will increase and we will continually bump up against any ceiling established.

     

    Some believe that freezing the debt ceiling will force Congress’ hand.  But the current debt is from money already spent or promised.  Are we really willing to tell the world that we won’t honor our obligations?  The consequences of that, both intended and unintended, could be catastrophic.  Those who suggest that it doesn’t matter are playing with fire and are going to get us all burned.

     

    The truth is, there is nothing significant about the debt ceiling number.  What is important is finding meaningful ways to reduce annual budget deficits and at least keep the debt from getting worse.  There are serious dangers in this debt limit brinkmanship.  It’s time for Congress to stop monkeying around, stop the political games, stop holding our citizens hostage over ideology, and get something done.  Thanks for reading.

     

    Nick Massey is President of Massey Financial Services in Edmond, OK.  Nick can be reached at www.nickmassey.com.  Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.