Imagine a child who keeps running back to their parents for “more” money. Each time they get an advance of new money, they quickly spend it all and return for more. This cycle of borrowing and spending can continue until the parents reach their limit and say, “No more!” In a way, this child’s behavior is similar to how the U.S. Debt Ceiling works. The government can only borrow up to a certain limit before asking for permission to borrow more. Like the parents who may eventually say “No more,” there is a limit as to how much debt the government can take on.
This is the very crossroad where we find ourselves today. According to Janet Yellin, the United States will run out of money very soon.” The U.S. Debt Ceiling is a limit set by Congress on the amount of debt the U.S. government can legally borrow to fund its operations. The debt ceiling is the total amount of outstanding debt that the U.S. Treasury is allowed to issue through the sale of Treasury securities to investors. It was first established in 1917 and has been raised many times since then. When the U.S. government reaches the debt ceiling, it cannot issue more Treasury securities to borrow money. This can lead to a government shutdown, as the government may not have enough money to pay its obligations. To avoid this, Congress typically raises the debt ceiling to allow the government to continue borrowing and paying its bills.
As we see this play out in real time, raising the debt ceiling can be contentious, with some lawmakers arguing that it allows the government to spend beyond its means and accumulate too much debt. Others say it is necessary to avoid a government shutdown and ensure the government can continue functioning. In an environment such as we are in where the Federal Reserve is fighting inflation, this matter is at the forefront of any new spending.
The United States has never defaulted on its debt in its entire history, but there have been instances where it has come close to defaulting. For example, during the Great Depression in the 1930s, the government came close to defaulting on its debt when many banks failed, and the economy contracted severely. At that time, the government took measures to balance its budget and regain the trust of investors, and it eventually avoided default.
In each of these instances, the government was able to avoid default and continue functioning, but the risk of default had real economic consequences, including increased borrowing costs, uncertainty in financial markets, and potential damage to the government’s credit rating. It’s worth noting that a default on the U.S. government’s debt would have severe consequences for the global economy, as U.S. Treasury securities are widely held as a safe and stable investment by individuals, institutions, and governments around the world. A default would likely cause a major financial crisis and have long-lasting effects on the global economy.
On a personal level, it’s important to manage debt responsibly and stay within one’s means. This means having a budget, living within one’s income, and avoiding excessive borrowing. In both cases, it’s important to strike a balance between borrowing to invest in the future and avoiding excessive debt. Just as an individual might take on debt to finance education or a home purchase, the government may borrow to invest in infrastructure or social programs. However, it’s crucial to ensure that the borrowing is sustainable and that the debt is manageable over the long term. I’m sure the debt ceiling will be extended before the June deadline, but unfortunately, most consumers don’t have that same luxury. Shout out to my incredible and loving family.
Shmuel Shayowitz (NMLS#19871) is a highly regarded Real Estate & Finance Executive, Writer, Speaker, Coach, and Advisor. He is President and Chief Lending Officer of Approved Funding, a privately held national mortgage banker and direct lender. Shmuel has over twenty years of industry experience, holding numerous licenses and accreditations, including certified mortgage underwriter, licensed real estate agent, residential review appraiser, and accredited investor, to name a few. Shmuel has successfully navigated through many changing markets and business landscapes, making his market insights and experience well-coveted within the real estate industry. He can be reached via email at [email protected].
