Shoutout To The Debt: What's Going On With The Debt Ceiling
You aren't the only one who can't budget, the US Government can't either.
Hey Hey, Hi, Ello -
I was listening to a song it thought said “Shoutout to the debt”, but it was saying death. Yet, in this instance on this debt ceiling - it seems like Americans aren’t the only ones with a budget problem. Well, it looks like a deal was reached. I added some context toward the end.
The commentary around the debt ceiling keeps showing how the roof keeps on fire when it comes to the economy we are facing. While this isn’t the first time we are seeing this conversation happening, it’s interesting to see how we are dealing with it - still.
The debt ceiling is pretty much a law that sets the benchmark for how much we can borrow - as a country. In this instance, there are three situational laws that need to be passed - at the same time. Yet, by law, this can not happen resulting in what we have here. These three focus on how much can be spent, how much the government can collect (taxes), and the deficit between the other two. There was a law presented called the “Limit, Save, Grow” Act which passed in April that would raise the debt ceiling by $1.5T or until March 2024 in exchange for budget cuts across the board, but still hasn’t been put into motion.
There’s even talk about a Trillion dollar coin being developed to help solve this issue. The notion comes from a law developed in the '90s which allows the Treasury to mint commemorative platinum coins of any denomination they want. Even the Simpsons made a spoof out of it, yet this could allow for bonds and other methods to be built to keep the ceiling from being broken. This coin idea is being tossed around to help avoid chaos, but doing it would cause some additional chaos - like investors could demand higher yields or interest rates on U.S. government bonds (China, Japan).
It’s like a tug-of-war when it comes to the budget that this country is being run on - side 1 wants to cut spending and then the other side wants to raise taxes. The interesting thing is that both need to be done and interwoven into having a sound expense plan during this time of pro-long inflation.
Just like you’re doing your budget and looking at expenses, Treasury Secretary Yellen says the US is "highly likely" to run out of sufficient cash by early June (first two weeks). Earlier this week, Treasury's total cash balance dipped below $60 billion; which isn’t a good sign. It’s like looking at your cash before you head out to the store and noticing that you don’t have enough cash to get the bare necessities. Technically the US spends $1.3 billion a DAY on interest expenses alone; that’s like carrying a balance on a high-interest loan that keeps compounding by the day. Outside countries invest in US bonds due to the likelihood of the bills being paid.
As we’ve seen over the last year, the stock market hasn’t reacted much (compared to March 2020) when we’ve mentioned the economy in regards to inflation, unemployment, interest rate, and now the debt ceiling. Yet, this week - the S&P 500 erased roughly $400 billion in market cap during the last couple of hours on Tuesday. When the stock market starts reacting to the economy directly, the writing on the wall is in bold font.
What we are seeing with the debt ceiling is that it will more than likely come down to the last minute to only be paused yet again. The combination from both sides is needed to fully see some sort of long-term relief vs a temporary fix. They carry the decision while the taxpayers carry the burden and it isn’t fair. Interestingly enough, we had a similar instance in 2011 that resulted in increased borrowing costs by $20 Billion + … yes, it has doubled since then.
The option that we are looking most at is the short-term increase over the next couple of months that would allow us to keep the country going until a decision is agreed upon - sorta. Yet, every country outside of Denmark doesn’t have a debt ceiling. I do believe that everything will be fine.
My take is that we don’t have anything to worry about, but this instance is giving that 70s show to what we are seeing with our debt ceiling.
But when it comes to the markets, it will remain a bit mixed. Keep a clear mind for those who are bond buyers. For Consumers, there’s nothing for you to do but watch your interest rates. For those that are connected to the direct pay of the government, more than likely you will be paid no matter what happens. I would still be trying to pay down debt and save money - due to the fact that the recession talk is still going on in the background.
This graph from Bloomberg was interesting when it came to what Americans would buy in case the unfortunate happens:
What do you think?
Two additional questions: should the debt ceiling be canceled? And do you think we could get this pushed back again to November/December?
Update to the original post.
Here are some of the things that were shifted with the agreement:
It includes a 2-year debt limit increase which will keep non-defense spending moreso flat. They pretty much did a settlement like you would do w/ your debt collector. What did they “save”: $50 billion or 0.2% of GDP. Roughly $200 (in consumer debt) off the bill. But the debt is still on their credit report - they still owe; the credit limit was pushed up for 2 more years.
- Debt ceiling to be raised for 2 years
- Cuts spending by $50 billion or 0.2% of GDP
- $10 billion of new IRS funding cut
- No budget caps after 2025
- No new taxes or government programs more than likely until 2024
- Defense and VA spending got a boost in spending
- Domestic program spending is frozen for one year
- Tightening of work requirements on TANF, SNAP - 50 to 54 yrs old
-Student loans: aligning w/ administration’s existing plan to end forbearance — “if” there’s another emergency they could again enact a moratorium. No overall change to the cancellation plan. Not shocked.