On Jan. 19, the U.S. hit its debt ceiling, the limit of the amount of debt the federal government can issue to honor its financial obligations, which is currently set at US$31.4 trillion.
U.S. Treasury Secretary Janet Yellen, in her recent letter to congressional leaders, assured that her department could buy some time for the lawmakers in the next few months by taking “extraordinary measures” to avoid an unprecedented default by the U.S. government.
Meanwhile in the coming weeks, if not months, the U.S. congress will need to decide whether to raise the debt limit or to suspend the debt limit. Raising the debt limit will allow the U.S. government to borrow more money to fulfill its financial obligations. Suspending the debt limit will lead to a freezing of the debt limit until a specific date.
Haggling over the debt limit has been a reoccurring legislative and political drama in the U.S. congress for decades, particularly when there is a Democratic president with one or both houses controlled by Republicans.
The U.S. debt ceiling, also known as the debt limit or statutory debt limit, can be traced back to its creation under the Second Liberty Bond Act of 1917 when the U.S. was trying to finance its engagement in World War I. A debt ceiling would allow the Treasury Department to issue bonds without going through the congress until it reaches the debt limit.
Since then, the U.S. debt ceiling has been raised or suspended numerous times, from US$9.5 billion in 1917 to US$31.4 trillion in 2021 (unadjusted for inflation).
While the purpose of the debt ceiling is to restrict government spending, lawmakers have often used it as leverage against the opposing party for budgetary purposes. When the executive branch and the congress are not controlled by the same party, disagreements on the debt ceiling can lead to standoffs and even a government shutdown.
In 1995 when Democratic President Bill Clinton was in office, the House of Representatives was controlled by Republicans. House Speaker Newt Gingrich at that time demanded government spending cuts in return for Republican support of the raised debt ceiling. It took a 26-day government shutdown for both sides to eventually compromise and reach an agreement.
A similar crisis took place in 2011 when President Barrack Obama and his administration hit the debt ceiling. The Republican majority in the House of Representatives succeeded in forcing the White House to agree to rein in spending before they came on board with raising the debt limit. The U.S. came very close to a default in the budget standoff that year, and Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+.
This time, Republican House Speaker Kevin McCarthy will play hard ball again in his negotiations with the Biden administration on raising the debt ceiling. He and his Republican colleagues demanded fiscal discipline and wanted the U.S. debt limit bill to be paired with spending cuts.
Despite the political wrestling on this issue, the U.S. government should be fiscally more responsible. Currently, the U.S. is still battling with high inflation, which is primarily caused by excessive liquidity pumped into the economy by the Biden administration. Major drivers of U.S. inflation such as wage inflation and property market inflation are internal factors rather than imported from overseas.
High inflation is a cold-hearted thief that steals money from everyone, taking pennies from the homeless and millions from billionaires. Politicians have the fiduciary duty to protect the value of the hard-earned wealth of the people they represent.
(The author is an independent financial investor.)