The Looming Debt Ceiling Crisis: What You Need to Know

“Promises make debt, and debt makes promises.”

Dutch Proverb

Former Fed Chair Ben Bernake once said “The U.S. government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at no cost.”

That printer may be running out of ink at long last as 2019’s debt ceiling agreement gets set to expire next week. The Bipartisan Budget Act of 2019 suspended the debt limit, allowing for the government to borrow as much as it wanted.

Should the debt ceiling not be raised, and no agreement reached, whatever the federal debt is on that date becomes the new debt limit, with no additional borrowing allowed.

That number currently stands at $28.5 trillion.

According to the Congressional Budget Office (CBO), debt would exceed 200% of GDP by 2051. Today this number currently stands at the highest in history at 129%, 5% higher than during World War II.

We are currently adding $120 billion per month to the balance sheet through bond purchases. This is a pace of nearly $1.5 trillion dollars per year. And even though these bonds sit as Assets on the Fed’s ledger, we also need to print the money to buy those bonds.

This is a problem we created ourselves during World War I. Before then, Congress had to authorize each individual bond offering by the U.S. Treasury, including interest rates and maturities.

But federal borrowing was so massive during the war that it was impossible for the Treasury to secure funds in a timely manner, leading Congress to give the Treasury general borrowing authority subject to a limit. This limit became known as the debt ceiling, and it continues to be used as a weapon today.

Draft on July 25, This includes Mick Mulvaney, Donald Trump’s Head of Office of Management and Budget appointee, and even President Trump himself, who in 2016 hinted that defaulting on the national debt could be used as a negotiation strategy to reduce debt.

As Ronald Reagan said in 1983, “The full consequences of a default—or even the serious prospect of default—by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The Nation can ill afford to allow such a result.”

Conservatives refuse to yield and Democrats refuse to negotiate. But as both sides butt heads, Biden and the left continue to propose trillions in new debt to be added to the tab.

According to the New York Times today, the Biden administration has added bribery to the list of proposed expenses, and has floated the idea that states and cities should pay people $100 to get vaccinated.

The blowout on deficit spending has no end in sight. The Democrats have already proposed a $3.5 trillion budget package to expand Medicare benefits, boost federal safety net programs and combat climate change; some of Biden’s top economic priorities -- all in addition to Biden’s $1 trillion infrastructure package.

That’s $4.5 trillion in new debt, which ordinarily would never pass muster, but as we’ve stated many times in the past, what’s crazy in normal times becomes necessary during a crisis. But these plans could essentially be nullified without agreeing to terms on a new debt ceiling.

However, the Dems have a third reconciliation bill in their back pocket which they’ve been saving for exactly such a bill.

Reconciliation bills are measures which can pass with just 51 votes instead of 60. These bills are tied to fiscal policies, with recent examples including Obamacare, Trump’s tax plan, and the $1.9 trillion American Rescue Plan stimulus package.

Our best guess is that Congress will kick the can for a couple of months before actually being forced to do a bigger debt ceiling raise by the end of the year.

Not to worry. The debt ceiling will definitely be lifted.

The reason why is simple. More and more debt is the only thing the left and the right can both agree on these days.

Best,

Adam Baratta

CEO

Brentwood Research