The Summer Of The Debt Ceiling

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At the time you receive this newsletter the issue of whether or not Congress and the administration in Washington have negotiated a debt ceiling agreement may have been decided. In any event, this expression of "debt ceiling" has been dominating the news for some time now and we thought that some clarity on the subject, along with historical trivia, might be interesting for our readers about this matter.

The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly reported value of $75,463,476.52 on January 1, 1791. However, it was in 1917 when Congress agreed on a limit of how much debt the United States could owe without risking default, and legislators may raise the limit when they feel we need to borrow more money to sustain the economy. Legislative action has resulted in raising the debt ceiling 74 times in the past 50 years and about 10 times since 2001. In the most simplistic sense, one can think of the debt ceiling like a credit card limit. It allows the Department of the Treasury to fund government operations by borrowing money through issuing bonds. The Treasury may not legally issue bonds above the debt limit allowed by Congress.

There are two components to the total public debt: 1) Debt held by the public representing all federal securities held by institutions or individuals outside the U.S. Government, and 2) Intragovernmental holdings, representing U.S. Treasury securities held in accounts which are administered by the U.S. Government, such as the old age and survivors (OASI) trust fund administered by the Social Security Administration. As of June 29, 2011 this total public debt amounted to $14.46 trillion and represented approximately 98.6% of calendar year 2010's annual gross domestic product.

As implied at the outset, all we seem to hear about in the media these days relates to partisan political bantering over whether there can be any agreement on how to handle the debt ceiling which is scheduled to max out on August 2. So what are the issues? If the debt ceiling is not agreed to, potential consequences can be cuts to nonessential programs such as National Parks Services.

A government shutdown would send home federal employees classified as nonessential. There would be a default on existing debt. Since foreign governments hold a substantial portion of our debt it would make them less trustworthy of our government and less likely to invest in the future. There could also be significant economic repercussions. With government cash flow cut off, Congress would have no choice but to significantly raise taxes and/or slash the budget to reduce expenses. Acting in an emotional response such as that could damage the stock market and effect unemployment in a significant way.

The arguments against raising the debt ceiling reflects its own set of apprehensive points of view. First it suggests a lack of government responsibility whereby it loses sight of our long term debt problems that we are facing and as the expression has become popular, the can gets kicked down the road! Next would be the collapse of the U.S. dollar. Raising the debt ceiling will most likely devalue the dollar as the perception would be that our currency is more risky and a greater possibility of default on our debt.

This subject of national debt has taken on a life of its own for some time now. The first National Debt Clock was invented and sponsored by a New York real estate developer named Seymour Durst in 1989. At that time, with a national debt of only 2.7 trillion dollars, a clock measuring 11 x 26 feet was constructed at a cost of $100,000 on a Durst building in New York City about a block from Times Square. An updated model was eventually installed on another Durst building at 1133 Avenue of the Americas (6th Avenue) on the side wall facing 44th Street. That model was built to be able to run backwards, which lends hope to the thought that our representatives in Congress will somehow be able to come up with a solution to the burgeoning debt that the U.S. is carrying. It would be nice to see reduction in those numbers in the near future!

By the way, for those of you who don't make it to New York City that often, much less drive or walk by the debt clock, there is another resource for you to check out. It is called www.usdebtclock.org. Truly a sea of numbers, but also provides the ability to follow up on your individual state finances as well. While all of the above hopefully provides some additional perspective on this matter of the debt ceiling, we certainly prefer to end this article on an upbeat note wishing everyone a wonderful summer season!

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