Debt and deficits
There is a lot of talk recently about the possibility of the U.S. defaulting on its outstanding debt. We, as a nation, owe over $31 trillion dollars. This is what the government has borrowed to pay for all the money it has spent over the amount of taxes that it collected from each of us. That works out to about $93,000 per person that each of us owes. Remember that we are the United States. We, by electing Congress, have spent that money. This is our debt.
Just to give you an idea of how much $31 trillion is, if we stack one-dollar bills, the stack would be 11,108 feet high — over two miles high.
So, how did we get here? We allowed our representatives to spend more money each year than the government collects in taxes. In 2022, the government spent $1.2 trillion more than it collected in taxes.
The government has borrowed $2.9 trillion from Social Security. Therefore, if the government was to ever default on its debt, it would not repay the money that it owes Social Security.
Let’s look at debt and deficits. Debt and deficits are closely linked. Debt refers to how much you owe, while a deficit measures how much less income you have, compared to your spending. When a government spends more than it makes in taxes, then it has a budget deficit. If a deficit isn’t corrected by raising revenue, then debt results. The higher the deficit, the more debt the government builds.
A government default on its debt means that it fails to pay back the money it owes to its creditors, such as bondholders, banks, or other countries. We owe China over a trillion dollars. This can happen when the government runs out of cash or cannot borrow more money to finance its spending and debt obligations.
A default by the government can damage the reputation and credit rating of the United States, making it harder and more expensive for it to borrow money in the future. It can also erode trust in the government’s ability to manage its finances and honor its commitments.
A default can trigger panic and uncertainty on Wall Street, causing bond prices to plummet and interest rates to spike, causing more inflation. A default places us on the delicate edge of an economic recession, causing the government to reduce spending, take in less tax revenues, and provide fewer public services, trigger higher unemployment, lower incomes, and higher poverty. It can also reduce consumer spending, and business investment, leading to lower demand, production, and exports.
Several government programs like Social Security and Medicare would be impacted, too. Military wages and even small business owners with federal loans would be at risk in the event of a default. Federal employees wouldn’t be paid and parents expecting a Child Tax Credit payment would get nothing.
A default of the U.S. can have spillover effects on the global economy and financial system. A U.S. default could have severe implications for the world economy, as the U.S. dollar is the dominant reserve currency, and the U.S. Treasury market is the largest and most liquid debt market in the world. A U.S. default could undermine confidence in the dollar and disrupt global payments, trade, and financial flows.
The Treasury market is the backbone of the financial system, and the dollar — the most widely used currency in the world. At times, Treasury debt is even treated as the equivalent of cash because of the surety of the government’s creditworthiness.
The debt ceiling is a cap on the total amount of money that the federal government is authorized to borrow via U.S. Treasury securities to fulfill its financial obligations.
In 2011, when lawmakers struck a last-minute deal to avoid breaching the debt limit, the S&P 500 fell 17 percent in just over two weeks. The reaction after a default could be more severe. But after a default, the perceived risk of holding Treasury debt could rise, making it more costly for the government to borrow for the foreseeable future.
The dollar’s central role in world trade may also be undermined. If you get two of the three major rating agencies downgrading securities, then you have a bunch of financial institutions that can’t hold those securities.
Throughout modern history, the U.S. has never defaulted on its debt. The government has a self-imposed borrowing limit known as the debt ceiling, and over time, it has raised or suspended that limit to help prevent the U.S. from defaulting on its debt. Since its introduction in 1917, Congress has enacted legislation to raise or modify the debt limit more than 100 times.
It’s time to do something about this. First, the debt limit should be eliminated. Having a limit sounds good, but it just allows politicians to play games with our lives. We do not want to see Social Security, Medicare, military salaries and child tax credits to be threatened over political power plays.
Then, we need to ask every political candidate if they will promote a constitutional amendment to force a balanced federal budget. If not, don’t vote for them. If the budget is balanced every year, we will not need a debt ceiling. A constitutional balanced budget will force Congress to live within our means. The only exception to a balanced budget would be in a time of war or national emergency, such as a pandemic.
If the government keeps spending more than it takes in, America will eventually go broke, which means that you and I will go broke. “The budget should be balanced, the treasury should be refilled, the public debt should be reduced, and the arrogance of public officials should be controlled.” (Ross Perot)