Tag Archives: Debt Ceiling

12.20.24
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One of Only Two – Time For Change

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The United States of America and Denmark share several commonalities. Both countries have democratic political systems. Each country enjoys a high standard of living. Both have a commitment to human rights and environmental concerns, with Denmark being a leader in renewable energy and sustainability, while the U.S. is witnessing a growing movement on those fronts. Both countries value education, enjoying high literacy rates. There is also a shared military alliance through NATO. What you might not realize is that the U.S. and Denmark are the ONLY countries that have a self-imposed statutory debt limit. Sure, there are other countries, such as Switzerland, that have mandatory balanced budget provisions which effectively limit the amount of debt , but they aren’t specified debt limits.

The U.S. first instituted a statutory debt limit with the Second Liberty Bond Act of 1917, setting the aggregate amount of debt that could be accumulated through individual categories like bonds and bills. The purpose in creating this legislation was to finance the country’s involvement in World War 1. The legislation allowed the U.S. to raise $9.5 billion in bonds that would be issued by the U.S. government. These bonds were marketed to the general population and to institutional investors to gain their support for the war. Was there a First Liberty Bond Act? Yes, that act had been passed earlier in 1917 allowing the government to issue $2 billion in bonds in order to support the war.

Importantly, and why we are where we are today with regard to the current deficit, the Second Liberty Bond Act program continued after the war. It set a precedent for public financing of government initiatives through bond sales. Although the debt limit was established in 1917 which allowed the Treasury to issue bonds without specific Congressional approval, the “limit” has been raised more than 100 times since then and roughly 78 times since 1960 alone. As a result, the US debt has risen from around $250 billion during World War II, to about $2.1 trillion during the Reagan years, to $5.6 trillion at the conclusion of the 1990s, and to today’s $36 trillion. So, why do we have a debt limit when it has been elevated so many times previously and to a magnitude certainly not contemplated in 1917?

The political brinkmanship associated with the debt limit debate rarely serves a purpose, often unnecessarily frightening Americans and our capital market participants. As we brace for another “discussion”, is maintaining a debt “limit” at all necessary? NO! Today’s federal deficit is in no way constraining to future generations. I’ve referenced Warren Mosler and his book, “The 7 Deadly Innocent Frauds of Economic Policy” on many occasions. He covers the topic of our government debt and whether we are leaving our debt-burden to our children, grandkids, etc. Mosler states, “the idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous.”

As Mosler explains, that the financing of deficit spending is of “no consequence”. He further explains that when the “government spends, it just changes numbers up in our bank accounts.” The government doesn’t borrow money, it moves funds from checking accounts at the Fed to savings accounts (Treasury securities) at the Fed. The good news, is that the entire federal deficit ($36 trillion or so) is nothing more than the economy’s total holdings of savings accounts at the Federal Reserve. The private sector now has an asset equivalent to the deficit. How wonderful! Can you imagine if we didn’t have the ability to deficit spend. Think of all the stimulus that would have been removed from our economy that supported jobs, wages, and demand for goods and services.

The major issue with our ability to deficit spend has nothing to do with financing it, but everything to do with providing too much stimulus that creates demand for goods and services that exceeds our economy’s ability to meet such demand. So, I ask again, does having a debt limit (ceiling) make sense? No, unless you enjoy all the grandiose speeches from the halls of Congress based on little knowledge of how our monetary system truly works. Finally, I’d like to give a special nod to Charles DuBois, my former colleague at Invesco, who spent hours educating me on this subject. Thanks, Chuck!

12.09.13
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Retire the US Treasury debt on the Federal Reserve’s balance sheet

An interesting idea floating around, most recently heard through Mark Grant, is that the US Treasury should retire the Treasury debt currently held on the Federal Reserve’s balance sheet.  Mark believes that the retirement of $1 trillion of the slightly more than $2 trillion in Treasury notes and Bonds on the balance sheet would eliminate near-term debt ceiling discussions and potentially reduce rates in the short-term.  We at Kamp Consulting Solutions like this idea very much.  Chuck DuBois, a former partner of mine while we were both at Invesco, has been touting this idea for a while, too.  We believe that the entire debt could be retired at once, but there are many investors who like the idea of holding US Treasury bonds and notes for investment purposes.

There are many market participants who fear that the retirement of the US debt would be inflationary, but in reality the swap of bonds with reserves actually reduces liquidity because the bonds are higher yielding.  Furthermore, many of the bonds are being used as longer-term investments, and it is likely that the reserves received in the swap would be reinvested in longer-dated securities and not used for short-term economic activity.

I’m tired of hearing about the debt ceiling, and the debates in DC as to whether this artificial ceiling should be raised.  I suspect that you may be, too.  Let’s retire some of the debt today, and eliminate this conversation from happening for a while.

10.01.13
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Washington’s Folly

I have to be careful!  I find myself shaking my head so frequently at what is transpiring in Washington DC, that I might suffer permanent nerve damage.  It is scary how uninformed our politicians are regarding economics, and specifically the role of federal deficits in generating economic activity.

There are four primary sources of profits at the macro level of the US economy including, consumption (consumer spending), corporate investment (plant, equipment and inventory), net exports (exports minus imports) and net government spending (deficit spending minus tax receipts).  Since the great recession, it has really only been the federal spending that has kept corporate profits at all-time highs (averaging > 10% of GDP).  The consumer and corporations have kept spending and investment below normal historical levels, and our net exports are nearly -$500 billion. If it weren’t for the fact that the US fiscal deficit was as great as it has been, the economic recovery would have been far more muted, especially in 2010 and 2011.

Remember, the Federal deficit = private savings! Cut back too much on the federal deficit spending without a commensurate pick up in investment and consumption, and we could teeter on the brink of another recession.  With employment remaining weak, we need corporations to pick up the slack.  We may also benefit by becoming a bigger energy exporter, reducing the negative consequence of being a net importer nation, but that might take years.  Until then, we need Washington to stop focusing on the debt ceiling and expend their energy on creating an economic environment that creates jobs and stimulates demand for goods and services.