Milan Cacic
May 18, 2023
Social media Economy Commentary In the news Weekly update Weekly commentaryCOULD THE U.S. DEFAULT ON THEIR OBLIGATIONS?
It's hard to turn on the TV or look at your newsfeed and not see a story about the United States debt ceiling debate. Even my 18-year-old son asked me what happens if US can't pay their bills. If the Republicans and Democrats do not come to some sort of agreement over the next few weeks then it is possible that the US will run out of money and not be able to pay its bills.
First we should understand history behind the US debt ceiling. In 1917, the US Congress enacted the “debt limit”. This limit is the maximum amount of debt that the US can carry. If the US spends more than the revenues it receives from taxes and other sources then it runs a deficit. That deficit will then be paid by borrowing more money, which increases the total amount of debt. The US has been spending about $1 trillion more per year then it's been receiving in revenue for each of the past three years. Which is why we are now again approaching the debt limit allowed by Congress. The current debt ceiling is $31.4 trillion and the current amount of total debt is approximately $31.2 trillion.
It's important for people to understand that we've been here before. As you can see from the chart below the U.S. Congress has increased the debt limit 76 times since 1960. What has changed with regard to the debt ceiling debate is that it's become more political. In 2011, there were lots of political theatre between the Republicans and Democratic president Barrack Obama which resulted in a deal just two days before the estimated time of the US running out of money. Since then, every debt ceiling increase has become contentious and political.
In the short-term, we believe the US will raise the debt ceiling just like they have the previous 76 times. However, the short-term debts limit increase is not the problem, the real problem is how the US will pay for the increasing interest payments on that debt over the long term. At some point, the US may have to cut their spending by adjusting their entitlement programs or raising taxes. You don't have to be a rocket scientist to figure out what most politicians rather do. This may be the next-generation's problems and not something that we want to think about today but that kind of thinking is what got us here today.
It should be noted that Canada has no debt ceiling and the Bank of Canada can borrow as they see fit. It should also be noted that Canada's financial circumstances are not much different than US.
I've also included a piece from our CIBC Economics Team entitled “The US debt ceiling debate: can anything good come from this?".
As always, if you have any questions please feel free to give us a call at any time.
Have a great long weekend.
Milan