Why the US is always hitting a “debt ceiling”

CREDIT RATES

AAA  AA  A  BBB  BB B  CCC

These grades aren’t for students. They’re for businesses. 

Based on how likely the company is to pay its debts back. A company like Microsoft has the best grade possible: AAA. Since they have a long history of paying people on time. "The Internet is about driving profitability.

" But a newer company like Tesla, has a BB rating and that affects their interest rates.

Microsoft pays its investors 2.5%. Tesla pays a bit more at 5.3%.

The riskier the grade, the higher the interest rate. But it’s not just companies that have grades: countries do, too. The United States, for a really long time, had a AAA rating. Until…

.. Lawmakers have just two days to raise the nation's debt ceiling and avoid a catastrophic default on its loans, which could create turmoil in the US economy and worldwide.”

"The Debt Ceiling"

The US has a weird thing called “the debt ceiling” which is just a limit on how much debt the country can take on.

If the national debt reaches that limit, the US might not be able to pay its investors. The US regularly comes close to hitting it but the government always ends up raising it. Until 2011, when it almost didn’t. After that, the US was downgraded by a credit agency for the first time, due to quote “political risks.

” Since then, Congress and the president have had to raise it 7 more times. It’s becoming an almost annual task. And of course, it always goes super swell…. "The entire basis of the Republican strategy is we're gonna shut down the government or cause economic chaos if we don't get 100% of what we want.

This isn't some damn game! Our Republican friends need to stop playing Russian roulette with the economy. In the last 20 years, the US has borrowed more and more money. The national debt is at an all-time high. But how should we feel about this debt? And what happens if we don’t pay it back? The US national debt is nearing 29 trillion dollars, with a capital T.

Depending on when you read this, it might already be there. It’s best not to look at it as a number but instead as a comparison to the size of the economy. You’ll see the US takes on more debt when the country spends a lot: because of wars, or because of investments needed during recessions and… now, pandemics. And the department in charge of all this is the US Treasury.

They collect taxes and spend them to fund the government. And, for the record, it's Congress and the President who decide how much taxes should be, and where the money should be spent. The Treasury just handles the flow of money. But for—essentially, ever—they approve more spending than they bring in with taxes.

So the Treasury has to make up that difference by taking on debt. And it does that by selling bonds. They can vary, but generally it works like this: You buy a $1,000 30-year bond at a locked-in 2% interest rate. Every year the Treasury sends you $20, the 2% interest you’ve earned.

And after 30 years, you can cash out the bond and get your $1,000 back. It’s a win-win situation. The US gets money to fund the government and you make some profit on a safe investment. More than a third of these bonds — and therefore the total US debt — are owned by Americans and American companies.

Investors, and also banks, local governments and even pension funds keep their money in bonds. And the largest part is owned by the federal government. Yes, the federal government owns part of the federal government’s debt. The money for Social Security is actually kept in bonds.

So is the money for Medicare. And federal pensions. The Federal Reserve has bonds, too. Foreign investors only own a quarter of the US debt.

And while Chinese investors used to have the largest share Japanese investors actually own more now. They own around 4% of all US debt. And it is a lot of debt. Of all the developed countries, the US has the fourth largest debt compared to the size of the economy.

So is this… bad? The really, really frustrating answer is we don't know. Debt has pros and cons. One question is what are you doing with the debt? When you're in an economic recession or an emergency not only should you borrow you should borrow a lot. But what you shouldn't do is borrow when your economy is strong and the political inconvenience of paying for things is too high.

Another really important question is what are interest rates? … In recent years, interest rates have been very low. That tends to make it easier to borrow and to sustain that borrowing. 

While all countries take on debt, only these two have debt ceilings. Denmark’s, however, is kept so high they’re not going to come close to hitting it. Unlike the United States, where the government is constantly having to raise the debt ceiling to pay for spending they already approved. That’s the big problem with the debt limit, is it's internally contradictory.

The government passes a law that says you have to spend 10. It passes a law that you can only collect 8 in taxes and then it passes another law saying you're not allowed to borrow 2. If the US does hit the debt ceiling, it would mean the Treasury couldn’t issue any more bonds. So, no more debt revenue.

Taxes would still be coming in, but that’s not enough to cover all these responsibilities. So maybe they stop paying federal employees. Or stop sending money for programs. But at some point, they won’t be able to pay the interest to these investors or cash out Social Security bonds.

That’s called a default. It’s never happened… yet!

You couldn't do more to sabotage your financial system than default. Interest rates could rise based on a reassessment that the United States was considerably riskier than people had thought before. When government bond interest rates go up, that usually means that other interest rates are going up.

If you borrow for anything, whether it's for a dishwasher, or a car, college, or your credit card, that's going to become more costly. We're going to lose jobs. Wages won't go up as high. We could be like these countries and just not have a debt limit.

Or have one so high it’s never a threat to the economy. Because if Congress and the President really want to take on less debt they can change the tax system. Or reduce spending. The debt limit does make sense if you are a functioning Congress, you're saying we need to put in place some policy to make sure that we don't borrow more than we mean to or we stop and we pause and we check on the borrowing.

That certainly isn't how it is working. The simplest thing would just be to repeal it and be like almost every other country in the world. Even if the US never actually defaults on its debt, just the mere political fights and “will they or won’t they” unease could make the United States a less desirable place to invest. It's long been seen as this kind of the safest asset that you can invest in, and so that's given the U.S. a lot of advantages. But the more our political system is so polarized and dysfunctional, the more that it becomes a question of whether the US should have the incredible advantage that it has had so far.