FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 30, 2023

U.S. Debt Ceiling Suspended For Two Years

IN THIS ISSUE:

1. Debt Ceiling Suspended – Congress Must Approve

2. Economy Grew Better Than Expected In The 1Q

3. What Is A Debt Default? Not Everyone Agrees

4. Should We Get Rid of the Debt Limit? Many Say Yes

5. Adding Spending Cuts To Debt Talks Is Nothing New

6. Everyone in Washington is a Big Spender, We All Know It!

Debt Ceiling Suspended – Congress Must Vote To Approve

As this is written, it appears we have a tentative agreement to deal with the debt limit which was struck over the weekend to avoid a debt default next week. The deal was reached between President Biden and House Speaker Keven McCarthy and still must be approved by Congress before it becomes law.

Actually, Mr. Biden and McCarthy didn’t agree to raise the debt ceiling by a specified amount; instead, they merely agreed to “suspend” the debt ceiling until January 2025, after the next presidential election. So, in effect, there is no debt ceiling now. This move did not surprise me. We all knew they would come up with something to avoid a debt default.

Which brings up another question: What actually constitutes a debt default? Not surprisingly, there are different answers to this question. While it looks like a debt default has been avoided for now, as taxpayers who fund everything our government spends, I think it is important for us to understand what a debt default is. So, that’s what we’ll talk about today.

But before we get to that discussion, let’s briefly review the latest key report on the economy. The Commerce Department reported last week that 1Q Gross Domestic Product rose at an annual rate of 1.3% versus 1.1% reported in its previous estimate in April.

Economy Grew Better Than Expected In The 1Q

The Commerce Department reported last Thursday that Gross Domestic Product rose at an annual rate of 1.3% in the first three months of this year. The latest estimate was better than the 1.1% the government reported last month.

The upward revision was mostly driven by an increase in private inventory investment, which includes finished goods, materials and works in progress being saved for a later date.

While last week’s increase in 1Q GDP from 1.1% to 1.3% was a welcome surprise, it was still well below the 2.6% rate in the 4Q of last year. But the point is, this economy continues to grow and add jobs at a near record pace.

While there continue to be widespread predictions of a recession later this year, I must remind you once again that this economy continues to outperform forecasters’ expectations. Maybe we get a recession later this year, but there are currently no signs of it. Just keep that in mind.

Now let’s move on to our main discussion today.

What Is A Debt Default? Not Everyone Agrees

While there are still widespread predictions of a recession later this year, there are some who are still worried the US might default on its debt at some point, for the first time in our history.

As I have maintained all year, I don’t see a debt default in our future. In fact, I think the whole discussion of a debt default is unfounded. The government can print as much money as it wants or needs to pay our bills – assuming the debt ceiling continues to be raised periodically – as we all know it will.

But even though I believe a debt default will be avoided, let’s discuss it in a little more detail today.

There are different opinions on what qualifies as a real debt default and what doesn’t. Many believe that so long as one can pay the interest on its outstanding debt, it is NOT in default, even if principal payments are delayed.

Many others, however, believe that if principal payments are missed or delayed, then this constitutes a default – even if interest payments are current. And there are others who believe that if one misses either interest or principal payments, it qualifies as a default.

So, which is it?

The preponderance of definitions I have read say a debt default has occurred when either the interest OR the principal on a loan has not been paid.

While this issue has been deferred by the latest decision to suspend the debt ceiling until 2025, some important questions still remain. I’ll tackle perhaps the biggest question just below.

Should We Get Rid of the Debt Limit? Many Say Yes

Every time we come to a debt limit impasse like the latest one, the question always comes up: Should we eliminate the debt limit altogether? And there are some compelling arguments why we should get rid of the debt ceiling.

Chief among them is the fact that we always raise the debt limit whenever we reach it. According to the Treasury Department, Congress has raised the debt ceiling 78 times since 1960 alone. So, why do we even have it.

Don’t get me wrong. I am still a strong advocate for reducing the size of government and cutting spending. The size of the federal government is out of control, and we spend way too much money we don’t have.

The national debt today is nearly $32 trillion, on its way to $50 trillion or more over the next decade. Again, why do we even have a debt limit? Let’s take a closer look at that question.

We didn’t always have a debt limit. Prior to 1917, Congress passed spending bills on a case-by-case basis – there was no debt limit. However, starting with the First Liberty Loan Act of 1917, Congress altered its case-by-case system by passing a series of laws that ultimately established an overall borrowing cap.

Of course, Congress made sure to include provisions which allowed for the borrowing cap, or debt limit, to be increased as deemed necessary.

Adding Spending Cuts To Debt Talks Is Nothing New

The latest debt limit negotiations were stalled because Republicans were demanding some significant cuts in federal spending to go along with the increase in the debt ceiling. Democrats, on the other hand, insisted on a so-called “clean” debt ceiling bill with no spending cuts at all.

Some in the media would have us believe this is the first time one political party tried to attach spending cuts to a debt ceiling bill. This is simply not true!

For example, Congress paired a debt limit increase with spending cuts and other reforms to reduce the deficit in 1985, 1987, 1990, 1993, 1997, 2010 and 2011. In some other years, lawmakers even negotiated spending increases during debt limit debates in 2015, 2018, and 2019. The point is, the current debate is nothing new.

Shifting gears, a pressing question is, “Why does Congress always wait until the deadline before taking action? Frankly, I’ve never heard a good answer to this question. Take the latest situation for example.

The Democrats had complete control in Washington – the House, the Senate and the White House – for two years before the Republicans retook the House in late 2022. At any point in that time, the Democrats could have voted to increase the debt ceiling, but they didn’t. It wasn’t a priority, apparently.

For some reason, Congress routinely delays the consideration of government funding until the last minute, at which point all spending bills are often combined into one large “omnibus” measure. When that happens, lawmakers are confronted with a “take-it-or-leave-it” proposition because they can no longer change any individual parts of the legislation.

The point is, lawmakers on both sides of the aisle routinely delay spending bills until the last minute. It’s probably because they don’t want to be seen as big spenders. But let’s face it – we are well beyond that point.

Everyone in Washington is a Big Spender, We All Know It!

Everyone knows the government spends more each year than it collects in revenues. Everyone knows there is a budget deficit every year. Everyone knows our national debt goes up every year. These are not secrets.

The real question is, who cares? Apparently, not many people. It used to be that conservatives were for cutting spending and reducing the size of government. Democrats were seen as the big spenders.

But not anymore. Conservatives have proven they can spend with the best of them when they have been in power in recent decades. Even Ronald Reagan ran budget deficits during his time in the White House.

The question is, how long can we continue to ramp-up our national debt?

As you can see above, our national debt has exploded by more than five times since 2000. It has more than tripled since 2010. We are on-track to run trillion-dollar annual budget deficits as far as the eye can see.

Yet borrowers continue to line up in the millions to buy our government debt, even when interest rates were at historic lows the last few years. How long can this continue? I certainly don’t know. All I know is the end won’t be pretty!

Wishing you all the best,

Gary D. Halbert

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