Debt Ceiling or Spending Limit?

Susanne Trimbath — Wed, 16 Feb 2011 19:44:45 -0500

We’re seeing a lot of debate in Washington about what is commonly referred to as the "national debt ceiling." This post is an attempt to shed some light – and provide some good resources for further information – on what this really means. National debt is not the total future obligations of the federal government to pay. It is basically all the public debt (like Treasury bills) plus money we owe to other governments – in other words this ceiling only puts a limit on how much the federal government can borrow, not on how much they can spend.

The national debt number is available "to the penny" at the Treasury Direct website. There are only a few categories of debt that are not subject to the limit, mostly having to do with the way that Treasury Bills are issued to pay all the interest up front (discounted) and the way that payment is handled in accounting terms. Raising the National Debt Ceiling involves raising the limit on the public debt ceiling.

There is a bigger number that most other countries use to define “debt”. The official definition for “debt” used in the European Union, for example, includes obligations to Social Security, Medicare, etc. at the national level, plus regional and local government debt. (Thanks to Yannick for initiating a discussion of the distinction with his comment to my 2009 piece on Public Debt Crisis.) In the U.S., the larger number is usually referred to as "total indebtedness". There is no limit set on the promises of the US government to spend money -- for example, the almost $13 trillion committed to the post-crisis bailouts and stimulus was not subject to the debt limit despite that number being almost equal to the total national debt. The limit only applies to how much the Treasury can borrow to meet its obligations. So if the question is “should the ceiling be raised?” then my answer is “it doesn't really matter.” Congress can keep spending without it.

When politicians say they are against raising the debt ceiling it’s usually referred to as “Grandstanding” – which Merriam-Webster explains is to act so as to impress onlookers.

The bailouts payments mount, the budget expands, the deficit widens, the national debt increases. How high is up?

Susanne Trimbath — Wed, 04 Mar 2009 16:07:12 -0500

How far can the totals go? Federal Reserve Chairman Ben Bernanke testified before the Senate Budget Committee on March 3, 2009. He believes that the markets will be “quite able” to absorb the debt issued by the US government over the next couple of years to cover all the bailout and stimulus payments “if there is confidence that the US will get it [the economy] under control.” When Senator Lindsey Graham (R-SC) suggested an “outer limit” at which the national debt was three times gross domestic product, Bernanke said that “it wouldn’t happen because things would break down before that.” They’ll be lending to homeowners who have higher debt ratios than that. Frankly, I’d rather lend to the US government at that ratio, and I suspect a lot of investors – both domestic and foreign – feel the same way.

On the one hand, Bernanke spoke like a “Master of the Universe” when he told the Senators that he wasn’t worried that printing all this extra money would generate future inflation. He said that when the economy begins to grow again, the Federal Reserve is “very comfortable” they will be able to deflate their bloated balance sheet. On the other hand, he did not sound like a Federal Reserve Chairman when Bernanke said “We don’t know for sure what the future will bring.” Of the two Bernankes I like the second one better: no one knows exactly what the future will bring. Why pretend that you know what the best action to take three years from now will be – or what impact it will have. I find it disconcerting, to say the least.

There are a few things we can watch for in the coming weeks and months. The President’s budget came out yesterday and will go through Congress now for approval. Don’t get too distracted by it though – virtually everything in it can change. Instead, work with what you know. The stimulus package was passed and the states are getting details now on how much and for what they can expect money from Washington. Focus on where that money is going. The best way to minimize the damage being done by the Federal Reserve’s printing presses is to be sure that money is spent in the real economy. That means roads, bridges, schools, sewer systems – and not research and development on sources of alternative fuel or studies on global warming. We are in the middle of a crisis. This is not the time to spend on wishes and dreams. If the money is spent on real infrastructure projects, it can help to mitigate the potential inflationary effects later.

The Treasury and the Federal Reserve have no choice but to keep their foot planted fully on the accelerator. Setting infrastructure in place now means we’ll get good traction later when the economy starts moving forward.