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The U.S. Debt Ceiling Explained

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The U.S. Debt Ceiling Explained The U.S. Debt Ceiling Explained We all have budgets to keep; whether or not we can Because it is considered profitable and safe to own U.S. comfortably keep them is a matter of planning for our bonds, the public has never declined to purchase them. income and expenses. Therefore, the U.S. government must determine its own limits for how much it can allow itself to borrow. This The U.S. government, as large and far-reaching as it is, amount, the debt ceiling, is set by a vote from Congress has a budget of its own. Unfortunately, it is not always and determines when the government legally must stop possible for the government to fulfill all its legal increasing its debt. obligations with the money it receives. Each year the government must find ways to fill any budget deficits. Some national debt is not a bad thing, but ideally, The government does this by borrowing through public governments will only have significant deficits during or internal debt. periods of war or economic downturn. When a country is functioning normally, it should be producing moderate The U.S. government cannot continue to borrow forever. budget surpluses to offset its debt and prevent it from Much like a credit card company putting a limit on a reaching its debt ceiling. (Because debt ceilings are fixed cardholder’s spending, the government has restrictions amounts, they eventually must be raised to compensate for its debt —this is known as the U.S. debt ceiling. for inflation.) How Does National Debt Work? In terms of calculation, a country’s national debt works like an individual’s debt. A country has income from Some national debt is not a bad thing, but taxes (and other sources) and expenses from the programs it runs and employees it pays. If the annual ideally, governments will only have expenses exceed the annual income, the government is significant deficits during periods of war or said to have a deficit. economic downturn. When the U.S. government has a budget deficit, it has the U.S. Treasury Department issues government bonds Why Is the United States in Debt? to pay for it. These bonds are purchased by private Except for a brief moment in 1835, the United States has individuals or foreign government and guarantee the always been in debt. Wars have traditionally caused the holders a certain interest rate over the life of bond. This majority of the strains on debt —World War II being the means that every dollar the government gains through peak for debt as compared to the rest of the value of the selling bonds, it will eventually have to pay back more. economy or gross domestic product (GDP). However, The money the government owes for these bonds is its because periods of rapid economic growth have always public debt. followed wars, extra debt has always been paid off Northern Oak Wealth Management, Inc. This article was written by Advicent Solutions, an entity unrelated to Northern Oak Wealth Management, Inc.. The information contained in this article is not intended to be tax, investment, or 555 E. Wells St. Suite 1625 legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Northern Oak Milwaukee, WI 53202 Wealth Management, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. ©2012 -2013, 2016 Advicent Solutions. All rights reserved. www.northern-oak.com (414) 278-0590 quickly while the reasonable portion of the debt kept spending money on its legal obligations. In essence, the pace with changes in the economy. United States would default on its loans. This would have horrific ramifications that would go far beyond a Starting in the 1980s, though, the government debt simple government shutdown. began to grow faster than the GDP. The Unites States began a habit of overspending and the national debt Why Not Default? ballooned. In 2012, under the stress of a worldwide It is not an understatement to say that a U.S. default on recession, the public debt surpassed the nation’s GDP its debts would reshape the world economy as it for the first time since World War II. The U.S. currently functions. The United States has, by a wide government officially owed out more than the country’s margin, the largest economy and government budget in economy is worth in a year. Presently, the total U.S. debt the world. Moreover, the U.S. dollar and U.S. Treasury sits at over $19 trillion. bond are staples for secure purchasing and investing in many countries. A sudden change in the reliability of With each increase in budget, the U.S. Congress has U.S. bonds (and a subsequent inflation of the dollar) had to adjust the debt ceiling. Since 1960, the could push the world into a deep economic depression. government has raised the debt ceiling more than 70 times. The U.S. Department of the Treasury has made the following statement on increasing the debt limit to meet its budget: “Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations—an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans—putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.” Paying Off the Debt With massive debt unsustainable and a defaulting on obligations not an option, the United States will have to alter its budget enough to start receiving surpluses every year. To make this transformation, the government can either increase its income or lower its expenses (or both). Unfortunately, neither or these options are always viable. Fiscal conservatives often criticize the first option, raising taxes, because it increases the amount of money the Raising and Surpassing the Ceiling government takes out of the private sector. With fewer Despite what many people think, the debt ceiling does dollars to go around the system, people spend less and not determine how much the government spends, but the economy slows down. However, the other option, when it cannot issue more bonds. The U.S. budget, also cutting spending, can be just as bad for an economy as voted on by Congress, determines how much the nation it reduces the amount of money the government puts spends each year on its programs and whether it will back into the system. have a deficit or surplus. When Congress votes to increase the debt ceiling, it is because it has already In addition to these public methods, the government also promised to spend more than is available. possesses the ability to inflate its currency and pass over its debt. Because the government owes money in If Congress were to disallow an increase the debt fixed dollar amounts, it could simply print money until it ceiling, the government would be forced to stop has enough to pay off its debts. This too is not a viable option—it would lead to a sharp rise in inflation that would destroy the national economy. Limitless Budget? The U.S. government’s spending record has led many people to suggest a repeal to the debt ceiling. While the idea of allowing the government to have limitless debt spending concerns many citizens and investors, the actual process of raising the debt ceiling is typically little more than a formality in Congress. As stated, the U.S. budget determines the planned expenses of the nation, while the debt ceiling only hampers the Department of the Treasury from taking quick action. Nevertheless, many proponents of keeping the debt ceiling cite that it serves as a regular reminder to Congress of how important it is to balance the budget. Planning Ahead Regardless of U.S. spending habits, individuals should never allow themselves to overreact to speculations about the future. With the current world economy functioning in an unprecedented way, it is almost impossible to predict what will happen with the debt ceiling and how exactly it will affect the economy. Despite the unknown, preparation always yields benefits for finances. Everyone should take steps to secure their present and future needs as early as possible. It is important to recognize that investing carries certain risks and that both ups and downs are to be expected. Eventually, the government will have to change its approach to its debt. Not surprisingly, these unknown changes will bring further unknown consequences. By staying current on congressional decisions, individuals can better prepare for changes in interest rates or monetary value. As U.S. spending habits move into uncertainty, knowledge becomes power. Experienced advisors have the knowledge to understand how market shifts affect your future. Regular consultation with your Northern Oak Wealth Management, Inc. financial advisor can help strengthen your portfolio for almost any fiscal climate..
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