Debt Limit: Facts and FictionJan 15, 2013
In this article, we look at the basic facts (and fiction) behind the U.S. government's debt limit. From trillion dollar coins to debt defaults, here's the bottom line.
As the debate over whether the U.S. government should increase its borrowing capacity reaches a fever pitch, we offer a cheat sheet for readers to better understand the facts and fiction behind the debt limit.
What is the debt limit?
The debt limit is the total amount of money that the U.S. government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.
How much is the debt limit?
Currently, $16.4 trillion is the debt limit and this threshold was reached at the end of December 2012.
When was the last time the debt limit was raised?
On August 1, 2011 was the most recent occurrence of a debt limit increase. A few days later, Standard & Poor’s downgraded the U.S. government’s credit rating from AAA to AA+. Prior to August 2011, the debt ceiling was last increased on February 12, 2010 to $14.294 trillion.
What happens if Congress doesn’t increase the debt ceiling?
If Congress fails to increase the debt limit, it would cause the government to default on its legal obligations – an unprecedented event in American history. The government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments.
Isn't the Federal Reserve monetizing the entire budget deficit?
No. The monetary base has been flat for the past 18 months, according to Economist Mike Darda of MKM Partners. "You cannot monetize debt if the central bank is not, on net, accumulating assets."
Can the U.S. Treasury monetize its gold assets?
According to the U.S. Mint, the government holds 147.3 million ounces of gold (NYSEARCA:GLD). Certain legal
experts have argued the U.S. Treasury Secretary is authorized to monetize gold assets. They cite similar actions by the Eisenhower Administration during the 1950s. The gold is held by the U.S. government at book value of $42.22 per ounce.
Why can’t a trillion dollar coin be issued to purchase debt?
The law does not restrict the U.S. Mint, at the direction of the Treasury Secretary, from creating platinum (NYSEARCA:PPLT) coins with an arbitrary value. And pundits have suggested a trillion dollar coin could be minted and deposited with the Federal Reserve and used to repurchase debt, thereby freeing up funds. However, such a move could put the credibility of the government’s creditworthiness at risk if the bond market interprets this strategy as a default. The “trillion dollar coin” idea was originally floated by a financial blogger as a joke.
Does the U.S. Treasury have authority to tap government pension funds?
Yes. The government has already begun to borrow from the federal employee pension fund to avoid exceeding its debt borrowing limit. According to U.S. Treasury Secretary Tim Geithner, the move will make $156 billion in borrowing capacity available. In a letter to Congress, Geithner said the funds removed from the pension account will be replaced after the borrowing limit is raised.
How did U.S. Treasuries react to the last debt limit increase?
In 2011, long term U.S. Treasury ETFs (NYSEARCA:TLT) with durations of 20+ years gained 33.96% in value, virtually matching their gains during the 2008 credit crisis. Intermediate term U.S. Treasuries with 7-10 year durations (NYSEARCA:IEF) gained 15.64% in 2011.
P.S. Here's a link to Secretary Geithner's pre-Valentines love letter to Congress: U.S. Debt Limit Notice
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