Q: What is the debt ceiling and why so much debate?
A: The federal debt ceiling is the statutory limit of total U.S. government borrowings outstanding at any given time. Until the early 20th century, government borrowing was authorized by Congress on a case-by-case basis.
With the entry of the United States into World War I, a more flexible regime was needed and Congress passed the Second Liberty Bond Act of 1917 establishing a cap on total debt but leaving the day-to-day implementation up to the Treasury Department.
Obviously, the limit has required upward adjustment over time, and has been raised 74 times since 1962 to its present $14.29 trillion.
Most other nations have no such procedure. What was originally conceived as an efficiency measure has evolved into a sort of ritual Kabuki dance in which the parties debate the appropriate levels of spending and debt before ultimately (and necessarily) raising the limit to allow the Treasury to pay its bills.
It is important to understand the superfluity of the debt ceiling. Spending and borrowing decisions are made by the Congress and signed by the President during the budget and spending authorization process. Once a budget is passed and the outlays authorized, the borrowing decision has already been made.
In April, the House and Senate passed a budget resolution that required the Treasury to borrow $15 trillion, $700 billion more than the current debt limit.
The current pitched battle over raising the ceiling then boils down to a question of whether the U.S. government is going to honor the obligations it has already made, or is prepared to renege on those promises.
That some of these bills go unpaid is unthinkable in the extreme, and the suggestion that the debt limit not be raised to fulfill prior promises carries potentially dire consequences.
All three major rating agencies have warned that a default (even a technical default of short duration) would lead to a downgrade of U.S. Treasury debt below the present AAA level. The potential for disruptions in the global capital markets as a result is a sobering prospect, particularly considering the fragility of the economic recovery.
The proper venue for the critical debate over debt and deficits is the budget process. Once that document is approved and the appropriations bills passed, the die is cast and the Treasury must write the checks. Congress must then ensure that the checks do not bounce.
Christopher A. Hopkins is a chartered financial analyst and vice president of investments at Barnett & Company, Inc. If you have investment questions you would like answered, you may email Business Editor Dave Flessner at email@example.com or call 757-6340.