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An Argument For The Debt Ceiling

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    January 11, 2013

    As we rapidly approach the great “debt ceiling debate,” of which we are told that we should“rise above,” there has been a rising chorus of arguments for ways to get around the debt ceiling, such as the platinum coin idea, as well as utilizing the 14th Amendment.   There have also been numerous comments made that the debt ceiling should be disposed of entirely.

    The idea of the “Trillion Dollar Coin,” or utilizing the 14th Amendment, are just simply bad ideas that should be dismissed immediately.  I say they are “bad ideas” because the last thing that we need, as a country, is an Administration that is trying to find ways to circumvent the law.  As such I want to focus my comments today on the later argument for disposing of the debt ceiling entirely.

    To fully understand my argument for WHY we should maintain the debt ceiling it is important to understand what it actually is and is not.

    The U.S. public debt is the money borrowed by the Federal Government through the issuance of securities (bonds) by the Treasury.

    There are two components of public debt:

      • Debt held by the public – these are bonds issued by the Treasury that are held by individuals, corporations, the Federal Reserve and foreign, state and local governments.
      • Debt held by the government accounts – this includes non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries such as the Social Security Trust Fund.

    Public debt increases, or decreases, as a result of the annual unified budget deficit or surplus (the difference between revenues and expenses and ignoring intra-governmental transfers.)

    Under Article I Section 8 of the U.S. Constitution, Congress has the sole power to borrow money on the credit of the United States.

    From the founding of the United States until 1917 Congress directly authorized each debt issuance separeately.

    In order to more easily finance the WWI war effort Congress passed the Second Liberty Bond Act in 1917 which established an “aggregate limit” or “ceiling” on the total amount of borrowing that could be done.

    The current debt ceiling was substantially established by the Public Debt Actswhere were passed in 1939 and 1941.

    Under these acts the Treasury is authorized to issue debt needed to fund government operations AS AUTHORIZED BY EACH FEDERAL BUDGET up the a stated debt ceiling.

    The U.S. President is supposed to propose a federal budget every year. This budget details projected tax collections and outlays and, if there is a budget deficit, the amount of borrowing the President is proposing in that fiscal year.Congress creates specific appropriation bills which authorize spending, which are signed into law by the President.

    A vote to increase the debt ceiling is, therefore, usually treated as a formality,needed to continue spending that has already been approved previously by the Congress and the President. The Government Accountability Office (GAO) explains: “The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.”


    It is the apparent redundancy of the debt ceiling which has led to suggestions that it should be abolished.  Why would you need a debt ceiling if the Congress and the President have already agreed on a set amount of spending for the upcoming year?  If the current government was operating normally I would likely be inclined to agree.

    However, that is not the case that we find ourselves in today.  It was the foresight of our founding fathers, that had witnessed their previous government run itself into financial ruin, who required a check and balance system be put into place to ensure that the government operated with some fiscal constraints.  It is within this check and balance system where the“debt ceiling” plays a crucial role.

    The current Administration has NOT PROPOSED, nor has Congress PASSED, a budget in the last four years.  Furthermore, the current Administration, and the Senate, have stated that they have NO INTENTION of passing a budget in the next four years.  It is within this irresponsible behavior that the debt ceiling comes into effect.  Yet over the past 4 years the debt ceiling has been raised 6 times.

    The Federal budget process, as stated above, is what establishes the amount of spending that is APPROVED through the constitutional process, however, WITHOUT a budget how is the debt celing supposed be established?  How much more debt should the government issue?  $1 Trillion? $2 Trillion?  Without a budget and without some constraint on debt issuance it becomes a spending “free-for-all.”  The current debt ceiling debate should be a wake up call that the current government is broken.  A repeal of the debt ceiling, or worse yet a work around with the coinage idea or invoking the 14th amendment, is the realization of our founding father’s worst nightmare – a government that has become fiscally irresponsible.

    Do we need the debt ceiling and its current debate?  You bet.  In my opinion the argument over the debt ceiling does several things:

    1. It raises public awareness to the fiscal issues surrounding our economy;
    2. It exposes many of the elected officials to public scrutiny and may force them act more responsibly if they want to be re-elected.
    3. It at least ensures that there will be a discussion, although not necessarily fruitful, over the issues of spending, revenues and debt.

    Will the debt ceiling be raised? Of course it will.  However, it should be remembered that despite the threats from the media, and the Administration, that failure to raise the debt ceiling would result in a catastrophic default of our debt – there have been two previous shutdowns of the government in past.  In 1995 and 1996 the U.S. federal government was shut down as the result of conflicts between the Clinton administration and Congress over the funding for Medicare, education, the environment and public health.  Subsequently, the government was shut down after President Clinton vetoed the spending bill set forth by the then Republican controlled Congress.

    The important point here is that the Government did NOT default on its debt obligations.  Government workers were furloughed and non-essential government services were suspended until a budget agreement was reached.  This is the way that it should work now.

    What should not be done is to try to find a way to circumvent a very important process.  As I stated in yesterday’s post it is indeed time for our government officials to “Rise Above” the debt ceiling debate, pass a budget, raise the debt ceiling accordingly and begin to function according to the Constitutional laws, and foundations, around which this country was established.  Anything less is simply shameful.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.