EconFact 10/08: Dealing with Debt

An anonymous reader messaged me today asking to “explain the debt ceiling in layman’s” terms…I’ll give it a shot.

 

What is it? 

The debt ceiling is a theoretical limit on how much the United States government can borrow through issuing Treasuries also known as federal bonds. Treasuries act as an “I-O-U” paper promising regular interest payments as well as a principal payment. I say it’s “theoretical” because there is no hard-and-fast rule in the Constitution or any legal source saying it needs to be a certain size. It is currently near $17 trillion dollars.

 

Is it a US thing?

Pretty much.

 

How does this practice compare to other countries? 

Let’s just talk big economies here. The UK and Canada’s Treasury can borrow however much they want. The EU has a stated goal of keeping government debt to 60% of GDP but it’s not a law. China probably laughs at the idea of a debt ceiling considering their debt.

 

What would happen if it were abolished?
It would be easier to borrow money by issuing Treasuries and the world wouldn’t have to freak out that much. But, it may freak out so-called “fiscal conservatives” who are worried that the United States has too much debt anyway.

 

What happens it’s not raised? 

So, it’s technically not raised since May 2013 and the US Treasury has been using what they call “extraordinary” measures to issue new debt. On Oct 17, Secretary Lew estimates the government will not have enough cash one hand to make payments. These can range from Social Security Checks, government benefits to interest payments to international investors. People are really freaking out because the United States has always made their payments (well, sorta) and the US Treasury has been the “benchmark” financial instrument for many rate calculations.

Two things, if I can be a little technical. The first is that the Federal Reserve, which holds a lot of Treasuries, may technically be insolvent because it would be hard to value the Treasuries on hand if the United States defaults. The second is that since the Treasury is a “benchmark” financial instrument” it can have the consequences equivalent to changing what a “centimeter” is for physics (yeah, take that science).

 

Has it ever been lowered?
No.

 

Can it be lowered?
Theoretically, yes.

 

Are Democrats or Republicans more likely to raise the debt ceiling?
The debt ceiling has been raised under Republican and Democrats controlled Congress and Presidents and a mix between.

 

How can we keep raising it? What’s the point of it?
This comes back to how the US governs itself. The debt limit was seen as a formality because it is just a bill acknowledging payment for things the US government has already bought. Just imagine the budget being what you order at the restaurant and the debt ceiling paying you credit card bill afterwards: the money has been spent already. It is a Congressional issue because Congress has the power of the purse according the Constitution.

The issue comes when you have the worst Congress ever (factually proven) being an obstacle for almost everything done in the Obama administration.

How does the 14th Amendment factor in to this? 

Part of the 14th Amendment says:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

This implies that the President may have executive power to raise the debt ceiling. However, this has never been done in history and the President Obama has ruled it out.

 

Do you have any cool facts about the debt ceiling? 

Yes –

  • The debt ceiling has been raised 14 times since 2001.
  • It has been raised 78 times total; under President Reagan’s administration it has been raised 18 times.
  • The debt ceiling has been in law since 1917 to fund the US entering World War I.
  • The mere debate of a debt ceiling talk has consequences: S&P, a rantings agency, downgraded US Treasuries in 2011, (the “I-O-U’s the US gives out), partly because of debt ceiling dysfunctions and partly because the US owes a lot of money.
  • The debt ceiling has been raised at an accelerating pace – Present Bush and Obama’s presidency has raised the debt ceiling from $6 trillion to $16 trillion.

Takeaway: Breaching the debt ceiling is bad news bears.

EconFact 09/30: How much is a scandal worth?

NOT the headline of my love life

NOT the headline of my love life

Since I’ve gotten exposure to the financial world in news, one thing that has always stuck with me is how firms and officials dance around accountability; for example, no one has gone to jail due to the 2008 financial crisis.
That’s why today’s announcement that JP Morgan has to pay almost a billion dollars AND admitted wrongdoing comes as a surprise for me. This comes as a shift in behavior from the SEC, the financial regulating body of the government and its new, aggressive leadership in the form of Mary Jo White. Banks and other large institutions do not normally admit any wrong doing despite settling with regulatory agencies because admitting wrongdoing can make itself vulnerable if future inconsistencies happen.
Here are some of my favourite the more recent scandals post-financial crisis.
  • JP Morgan’s oversight led to $6 billion in trading losses in early 2012.
  • Barclay’s has been implicated to manipulating the LIBOR rate – the London Inter-bank Offered Rate which is an important benchmark rates that influence things like mortgages or car payments.
  • HSBC has been money laundering for Mexican drug cartels. I wonder if Walter White has his money there.
  • The Vatican Bank has sketchy accounts used to smuggle money.
  • Goldman Sachs buys a tonne (in actuality, more like thousands of thousands of tonnes ) of aluminum to set the price of it.
  • PVM Oil Futures had a trader who traded half a billion dollars of oil while drunk causing oil prices to spike.
  • Dow Jones had a Flash Crash of nearly a thousand points due to computer error. To put this into context, people freak out about the Dow moving a hundred points on a daily basis.
  • <Takeaway: Finance has scandals. Surprise, surprise!