Congress has now voted to temporarily raise the debt ceiling for the federal government until early December. We were all told we dodged a big bullet because not raising this limit, and presumably not doing so again seven weeks from now, would be worse than terrible.
Not raising the debt ceiling would certainly force some financial upheaval in the federal government. But we are being conditioned to believe that this upheaval would immediately and unequivocally result in a US credit default. Of course, no one wants that to happen. But would it really have to happen, or is this just fearmongering in order to hide a different problem?
The truth is, even if the debt ceiling isn’t raised, the disaster of defaulting does not have to occur. If it does, it would have been a conscious political choice made by Congress and the President to make it happen. Here’s why:
The debt ceiling problem is essentially no different from how your credit card and family finances work at home. If you max out your credit card by charging too many purchases, you can ask the bank to increase your credit limit. This is exactly the same as Congress wanting to increase the federal debt limit so they can spend more money on “credit”.
If you have a balance on your credit card (maxed out or not), you must make a minimum monthly payment in order to stay out of trouble with the bank. That minimum payment is mostly interest. The Federal Government must also make a minimum payment each month on its credit balance. In the government’s case, that minimum payment is all interest. If the government doesn’t make this minimum payment, it will also get into big trouble with its “bank”, just like you.
If the bank won’t increase your credit card limit or give you a loan, and your family finances have become so tight that you can’t meet all of your monthly expenses, you have to make some hard choices. The first thing you must decide is which monthly payments are critically important and need to be paid first. In most people’s case, that probably means buying food and paying the rent. Since the government doesn’t eat food or pay rent, its most critical item is making that minimum interest payment on its debt so it doesn’t default and get in trouble with its creditors.
Next, you have to go down the list and decide which monthly expenses in your family budget can be reduced or eliminated so you don’t “default” on any of your other important obligations. The government must do exactly the same thing.
In family budget discussions, it is likely that there will be disagreement about which items are critical and which are not. The same is true within the federal government. And just like within the family, arguments will be made about the crucial importance of an item because of the cataclysmic consequences of not having it. But in both cases, the fact remains that there are choices. Not easy ones, but nevertheless choices. This is where we are being deceived.
Rather than Congress telling us that difficult (and politically unpopular) choices would have to be made to fund fewer items in the federal budget without a debt ceiling increase, we are being told instead that an economic apocalypse would occur in the US. And if that isn’t enough to scare you, they add in that its calamitous effects would spread throughout the world.
The reality is that if the federal debt ceiling isn’t raised, the government enters into precisely the family situation described above. They cannot spend any more money on credit, and their finances are to the point where they can’t meet all their monthly obligations. The governments monthly “income” (from ongoing tax revenue) is only enough to pay for about 60% of its monthly bills. The other 40% is always charged on the government credit card each month, which is now maxed out and can’t be used. The first bill that should be paid in this situation is the interest payment on the national debt. That would immediately eliminate the problem of “default” most often described by Democrats and the media as the catastrophic scenario. It would take about 8% of the governments available monthly income to pay this bill. However, the party in power doesn’t want you to know this is a choice. That’s because if you knew that, you might ask what all the hysteria is about if we aren’t really in any danger of a credit default. We’ve got plenty of income to cover the interest payment, so just pay it and move on to the next most important item.
If we did that, we’d now be left with enough money to cover roughly 52% of all the remaining government expenses for the month. Now would come the debate on the next most critically important item in the federal budget. From past experience, we already know the shape of this argument. Democrats would make the case that all the social entitlement programs must come next (Social Security, Medicare, Medicaid). Many Republicans would contend that maintaining the military must come next since defending the nation is our first duty as a country. Let’s look at how the numbers would come out for each of these potential choices:
- Fully funding Social Security, Medicare, and Medicaid presently takes up 47% of the federal budget. Since we have enough money left to cover 52% of the budget (after having made the minimum payment on the debt), all three of these programs could be fully funded. However, that would leave only 5% of the income left to cover all the remaining federal budget items, including the military.
- Fully funding the Defense Department takes up 15% of the federal budget. If that bill was paid next instead of the social programs, it would leave 37% of the income remaining for other budget items. That would not be enough money to cover all the social entitlement programs.
As in any budget discussion, whether it be a family budget or the federal government, a lot of compromises and “horse trading” need to happen to get to the point where things balance out in the end. For example, instead of fully funding all the social programs or the Defense Department, portions of each of them could be funded in order to be able to pay for a reduced version of them all.
The main point here is that this is not so much an apocalyptic scenario as it is a much needed reckoning of the federal budget. The government cannot continue to operate as if there is no upper limit to how much of its spending can be financed on credit. That’s not the way it works for all of us at home and it’s not the way our government is supposed to work either.
The more the federal government borrows, the greater that minimum monthly interest payment on the national debt becomes. That interest payment for 2022 is expected to be about $400 billion dollars. In President Biden’s own 10-year budget plan, this minimum annual interest payment is projected to rise close to $900 billion in 2031. Think about that for a second – the annual minimum payment on the government credit card will be just under 1 trillion dollars by then. Not only that, in 2031 this minimum payment will consume twice the amount (16%) of the budget as it currently does. As a result, if the hypothetical federal budget negotiation outlined above were to happen in 2031 instead of now, there would be far fewer options on the table.
If we don’t have this financial reckoning now, mathematics will force us to have it soon anyway. As the debt interest payment eats up an increasing percentage of the budget, the current percentage of everything else in the budget must contract (that’s how percentages work!). Some parts of government will have to shrink or shutdown permanently in order to make room for the rising interest payment. And if interest rates go up, the governments interest payment on the debt will rise even faster. This is a spending problem, not a credit limit problem. Better to tackle this issue now while we still have some choice in the matter rather than later when we have very little.
One Response
The debt ceiling panic is fictional for sure. Another piece of the puzzle that is not specifically mentioned is assets. Whether it’s business or personal, obtaining credit from banks is heavily based on cash flow and net worth. Net worth, whether personal or business includes tangible and some intangible assets. When we look at national debt, we always look at spend vs revenues which fail to paint the entire picture. So, what does the entire picture look like? What is our country’s net worth? Sounds silly but it should be the basis for borrowing. Is our country worth $30 trillion? The government has huge assets they could sell to states and/or public companies – even countries. The Government does not disclose value of many assets in it’s balance sheet (stewardship hocus pocus) that it spends revenues on. Military assets and true values of federal lands, just to name some major ones that are hidden. What would our country’s real balance sheet look like? This would be how debt is determined by businesses looking to borrow from banks. Just curious.