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The debt ceiling: A concern until it’s not

ECONOMIC VIEWS BRIEF
Russell Price | Chief Economist – Ameriprise Financial
September 29, 2021


Key Points

  • The federal government reached its self-imposed debt limit on July 31, 2021.
  • According to the Treasury Department, Congress needs to lift the debt ceiling within the next few weeks to avoid missing interest and principal payments.
  • Not lifting the limit in a timely manner could result in a U.S. government default which could have serious negative consequences.
  • As has been done in the past, we believe elected officials will raise the ceiling within time.
  • Very few countries place a limit on their own debt but those that do often use a target

Doing the “Washington math” has become advanced calculus of late. Time-sensitive decisions on the debt ceiling and federal budget seem to have become lost in a matrix of partisan politics, huge new spending bills, reconciliation, 60-vote thresholds, and inter-party squabbles.

 

In our view, of all the considerations currently under debate on Capitol Hill the debt ceiling could easily be the most consequential. The U.S. is one of about seven nations that place a limit on their debt. Most target country debt to be held below a certain percentage of gross domestic product (GDP). In Poland, for instance, lawmakers are limited to keeping debt to GDP below 60%.

 

Historically, the U.S. debt ceiling has been depicted as a dollar value (see table on page 3). In recent years, however, elected officials have more often chosen to set the ceiling to a specific date or suspend it for a specific time. In the current instance, legislation passed on August 19, 2019, set the debt ceiling at its dollar value on July 31, 2021.

 

Since the end of July, the Treasury Department has utilized “extraordinary measures” to fund government operations and meet the country’s debt obligations. This is the same process that’s been used in past instances over the last 15 years or so when the debt ceiling has been reached. Treasury Secretary Janet Yellen recently noted that
extraordinary measures could be utilized until about mid-October to early November.

 

The chart at the top of the next page shows the dollar value and percentage of U.S. federal debt outstanding and in the hands of the public relative to GDP. When considering the ceiling, the debt figure of consequence also includes inter-government debt as related to the Social Security Trust Funds and other government inter-operations. According to the Treasury Department, since July 31, 2021 that limit is $28.4 trillion.

 

Unfortunately, we’ve been here a few times in the last two decades. As in those past instances, we feel strongly that the debt ceiling will not be breached by a missed principal or interest payment. As the Federal Reserve described it, the consequences of such a decision would be “severe.” And a decision is what it would be. U.S. Treasury operations are a key function of the global financial system and computer networks are built on its systematic principal and interest payments. Treasury operations are SO entrenched that financial literature, formulas, and theory have long referred to Treasury rates as the “risk-free rate” (textbooks would have a lot of re-writing to do).

 

Read the full report