US Default on Debt: Why Congress Must Raise the Debt Ceiling

The US government shutdown that went into effect on October 1, 2013 (day one of Fiscal Year 2014) is bad enough, with regular services and operations suspended and all non-essential personnel furloughed. What is worse, however, would be if the US Congress fails to raise the "Debt Ceiling" on (or before) October 17, 2013.

What is the Debt Ceiling? 

The New York Times and BBC both have great bullet-point articles on the Debt Ceiling. The main gist is this: 

• The Debt Ceiling is the limit on how much money the government can borrow by issuing bonds and securities.
• The President proposes a budget, Congress amends it as they see fit and they pass it back to the President to sign into law. The government routinely passes spending bills without consideration of how they are funded, and as a result the US federal government has had to borrow money to cover the budget deficit every year since FY 1940 with the exception of the 12 fiscal years (that's 12 out of 73 years, or 16% of the time) when the government actually had no deficit/ran a surplus. 
• The other 61 fiscal years between 1940 and 2013, the government ran a deficit. To finance operations the Treasury continually sells Treasury Bonds and Securities (debt) to investors. The US government is responsible for interest payments on those bonds, and repayment of the principal value of the bond when it matures. Technically, the government can keep selling bonds to cover the amount it already owes in order to cover the expense of paying interest and mature bonds. This amount aggregates over time and has become the US National Debt, which as of Oct 4, 2013 stands at $16.7 trillion.
• Raising the Debt Ceiling authorizes the government to issue more bonds to pay the money it already owes-- namely interest payments and principal on bonds and securities it has issued. The Debt Ceiling has been raised almost every year (on average) since 1940 with no problem-- until certain members of Congress were elected in 2010. 
• The US Constitution requires the government to pay its debts, so a default would be unconstitutional, on top of having horrifying consequences in the US and abroad.
• According to the Congressional Budget Office, debt management options will run out sometime between October 22 - October 31 if the debt limit is not raised on or before October 17, 2013.

Since 1940, Congress has raised the Debt Ceiling 82 times.*

*The Debt Ceiling was reduced only a handful of times out of approximately 92 adjustments since 1917.

Raising the Debt Ceiling is necessary to make the payments that the US government has already promised. It has no effect on actual budgetary concerns unless Congress fails to raise it. If that happens, the US will default on its debt within 14 days, credit agencies will downgrade the US government's rating (remember what happened in August 2011 when Congress threatened to not raise the Debt Ceiling?) and investors who buy Treasury Bonds and Securities will demand higher interest payments.

Right now interest on US Bonds is so low that an investor is practically paying the US government to hold his money for him because the yield rate on a 10-year bond can easily be outpaced by inflation (and even longer term bonds like 20 or 30-year bonds are paying pretty slim amounts). So issuing bonds right now to pay off the US government's previous debt obligations could actually be a very smart move.

Being forced to issue bonds at higher interest rates would mean that, while US Bonds may become a more attractive investment to people who actually want to make money instead of having a safe place to hold it, a larger portion of the federal budget would go toward paying off interest on the National Debt. That could lead to larger deficits and possibly additional defaults... and certainly would have as much, if not greater, impact than the Financial Crisis in 2008.

Remember how scared everyone was of the global impact of a debt default in Greece? ...Well, Greece is not the United States.

For more information on why the National Debt isn't really a problem (unless Congress fails to raise the Debt Ceiling), see my previous blog post "The Public Debt: A Menace to Society?"

The US created the Debt Ceiling in 1917, mostly to fund WWI, but also to cover any other borrowing the government may need to do in the future. Many other countries don't even have a "debt ceiling"-- they either just borrow whatever is necessary to cover their deficits, or they  must work within budget restrictions by appropriating funds for each initiative.

Political division has been particularly contentious during the Obama administration, with many members of Congress (mostly in the House of Representatives) effectively "holding the nation hostage" in order to delay or prevent several Obama initiatives like the Affordable Care Act, and also to push their own specific agendas that would otherwise not pass.

What Can Be Done?

It's in the hands of Congress. If you are a US citizen, you can call or write to your representatives and encourage them to raise the Debt Ceiling. Congress can raise, eliminate, or enact automatic increases to the Debt Ceiling. Any of those actions would avert a debt default. Congress could also draft new legislation that provides a framework for fiscal responsibility-- although there really isn't time for that now.

President Obama could choose to ignore the debt limit and authorize the Treasury Department to issue bonds without Congressional approval, but that would be a violation of the Second Liberty Bond Act of 1917 that created the limit. Certain members of Congress may consider that an impeachable offense. On the other hand, not raising the Debt Ceiling is effectively the same as defaulting on current debt, is unconstitutional (US Constitution, 14th Amendment, Sec. 4), and could reasonably be argued to be a matter of national security and global stability.

To avoid US debt default and avert a global financial meltdown, Congress must raise the Debt Ceiling on or before October 17, 2013.  

Supplementary:

Fiscal Years Since 1940 without US Federal Budget Deficit and the Sitting US President

Clinton

FY1998-2001 

Total Surplus (2011 dollars): $726.3 billion

Johnson

FY 1969

Total Surplus (2011 dollars): $19.5 billion

Eisenhower

FY 1960,  FY 1956-1957

Total Surplus (2011 dollars): $66.8 billion

Truman

FY 1951, FY 1947-1949

Total Surplus (2011 dollars): $244.6 billion