Government Default or Raise The Debt Ceiling?

Will the government default or raise the debt ceiling again? The U.S. Treasury Department is now calling on Congress to raise the debt ceiling once again to prevent a government default.

Officially, the current United States debt ceiling expired on March 15th, 2017. The following day, the outstanding debt of the United States was at the statutory debt limit. This means that lawmakers must now decide how to address the nation’s fiscal problems or face government default.

Treasury Secretary, Steven Mnuchin, recently sent a letter to House Speaker, Paul Ryan, on March 8 urging Congress to raise the debt ceiling as soon as possible. The Treasury will begin to take “extraordinary measures” to prevent the U.S. from defaulting on its debt, Mnuchin wrote.

What Is The Debt Ceiling?

The restraining factor on the amount of U.S. debt is called the debt ceiling. The U.S. Treasury defines the debt limit as the amount of money the U.S. government is authorized to borrow to meet its existing legal obligations.

The national debt is rapidly approaching $20 Trillion. You can check the current status here: http://usdebtclock.org

Major entitlement programs, including Social Security, Medicare and Medicaid, make up almost 50% of all federal spending and are only expected to increase in the future as more Americans retire. Entitlements and net interest are projected to consume 100% of the government’s tax revenue by 2030.

Future entitlements will exacerbate our nation’s growing debt problem. As government debt mushrooms it imposes the threat of higher taxes in the future. Currently, just the U.S. spends about $258 Billion, or 6 percent of the federal budget just to pay the interest on the debt.

Why The U.S. Treasury?

The U.S. Treasury was created in 1789, and is the government department responsible for issuing all Treasury bonds, notes and bills. Among the government departments operating under the U.S. Treasury umbrella are the Internal Revenue Service (IRS), the U.S. Mint, the Bureau of the Public Debt, the Alcohol and Tobacco Tax Bureau, and the Secret Service.

Some key functions of the U.S. Treasury include printing bills, postage and Federal Reserve notes, minting coins, collecting taxes, enforcing tax laws, managing all government accounts and debt issues, and overseeing U.S. banks in cooperation with the Federal Reserve.

The U.S. Treasury is spending on average about $2 Billion per day, and they have the ability to issue more new debt. Net redemptions of existing debt not held by the government are more than $100 Billion a month.

The Federal Reserve System was established in 1913, ironically the same year as the IRS. The Fed serves as the central bank for the U.S. and influences monetary policy.

Supposedly, The Department of the Treasury and Federal Reserve work together to maintain a stable economy.

Depending on who you listen to, as the US Treasury sells bonds this may increase or decrease inflation. But, make no mistake, as the Federal Reserve prints more money, this inflates the money supply which is in inflation.

The negative effects of the debt not only accrue in over time, but they also create a burden on future generations and weaken our economy. Currently each US citizen owns roughly $61,000 of the government debt and each US taxpayer about $165,000.

The government borrows from the Government Securities Investment Fund (G Fund) to avoid running up against the debt ceiling limit. The G Fund is a government account that is used to fund the government on a short-term basis to make up for the deficit spending by the government. The Treasury has “suspended reinvestment” or taken assets out of the G Fund to pay for these other expenses.

Many federal employees are contributing to financing the operation of the federal government whether they know it or not. Assets within the Thrift Savings Plan (TSP) are used by the federal government to help meet expenses.

The TSP is similar to a 401(k) retirement fund. It is utilized by over 5 Million current and former government employees and service members. There are assets of about $480 Billion in the TSP, of which 38% is in the G fund.

History of United States Deb Ceiling

From Wikipedia:
The history of United States debt ceiling deals with movements in the United States debt ceiling since it was created in 1917… The debt ceiling is a limitation on the federal government’s ability to manage the economy and finance system.

• Prior to 1917, the United States did not have a debt ceiling. In 1917, during World War I, Congress created the debt ceiling with the Second Liberty Bond Act of 1917, which allowed Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling.
• In 1939, Congress instituted the first limit on total accumulated debt over all kinds of instruments.The debt ceiling, in which an aggregate limit is applied to nearly all federal debt, was substantially established by Public Debt Acts passed in 1939 and 1941 and subsequently amended.
• Subsequent Public Debt Acts amended the aggregate debt limit: the 1942, 1943, 1944, and 1945 acts raised the limit to $125 billion, $210 billion, $260 billion, and $300 billion respectively.In 1946, the Public Debt Act was amended to reduce the debt limit to $275 billion. The limit stayed unchanged until 1954, the Korean War being financed through taxation.

In practice, the debt ceiling has never been reduced, even though the public debt itself may have reduced.

Depending on who is doing the research, it is said that the US has raised its’ debt ceiling (in some form or other) at least 90 times in the 20th century.

What would a Government Default mean?

According to many, a government default would destroy the credit system of the United States. The benchmark of interest rates in our modern financial markets are the risk factor on government issued bonds. Therefore creating a high degree of risk around U.S. Treasuries and disrupting many private contracts and government programs.

The NEGATIVES of a Default:

• Interest rates could rise, because “Treasuries represent the benchmark borrowing rate” for all other bonds. This could mean increased costs for corporations, state and local government, mortgages and consumer loans.
• The value of the dollar could drop, as foreign investors flee the “safe-haven” of Treasuries. And, the dollar could lose its’ status as a global world currency.
• The U.S. government may not be able to pay salaries or benefits for federal or military personnel and retirees. Social Security, Medicare, and Medicaid benefit payments might stop, as would student loan payments, tax refunds and payments to keep government facilities open. If this happens, it would be much worse than a government shutdown.

As recently as 2013 many government landmarks were shut down due to Congress delaying raising the debt ceiling.

A US default could also be catastrophic to the stock markets and disrupt the global economy. However most market analysts describe the risk of default as very unlikely.

To put into context the magnitude of a US default, consider that the U.S. dollar represents 75% of the more than $5 Trillion worth of daily global currency trading.

The POSITIVES of a Default:

Many think a government default is overdue and that we should wipe the slate clean. Just as a fire can destroy a forest while allowing for new growth, this could be a good thing according to some. President Trump has even indicated that a U.S. government default is inevitable. And, if this happens we will have no choice other than to tell our creditors that they are taking a big haircut

And, of course the Austrians have an entirely different outlook on the government debt. If you follow Austrian Economics, they advocate smaller government and less spending. Austrians have predicted a government default and a collapsing economy for years, even suggesting that we cease using fiat currency and return to a gold standard.

Austrian Economist, Murray Rothbard, argued:

The government is an organization, so why not liquidate the assets of that organization and pay the creditors (the government bondholders) a pro-rata share of those assets? This solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in annual interest payments. The United States government should be forced to disgorge its assets, sell them at auction, and then pay off the creditors accordingly.

How could a Government Default affect you?

To put it simply, if you depend on the government in any way or if your savings are being held by the financial institutions, you will be affected in some way.

Banks will tighten credit and offset losses with higher interest rates on loans. Consumers may be dissuaded from purchasing a new car or a home and this will affect businesses that sell these items.

If you have money in the stock market, a default could be disastrous in the short term. However, just in any situation, many will also profit from the losses of others. So, it depends on how you respond and if you are liquid.

As of this writing, the US markets are down substantially. A one day drop of over 1% in all of the major markets represents substantial losses for all investors. What the future holds is uncertain, but rest assured, the government must get a hold on spending or risk collapsing our fragile economy.

Are you comfortable having the US Government in control of your financial future? All government qualified retirement plans are subject to confiscation by the Treasury/IRS. Whether it be through manipulation of interest rates by the Federal Reserve, or the raising of taxes by the IRS, your hard earned savings could be at risk.

The good news is… You don’t have to depend on the government or the banks to create wealth and financial independence. If you’d like to learn more about what you can do, contact me for a no obligation, financial review. Just follow this link to schedule your personal consultation: https://legacyinsuranceagency.com/contact/consultation

Until next time,
It’s your money, protect it!
Barry Page

Barry Page is a Registered Financial Consultant, Managing General Agent and Founder of Legacy Insurance Agency, PLLC. He helps clients with tax-advantaged investment alternatives, and specializes in showing families how to protect their assets, income and lives unique financial approach to planning.