U.S. debt ceiling Q&A with SEMO's David Yaskewich

A term that has been bandied about daily in recent weeks but which many people may not understand is the debt ceiling.

Just what is the debt ceiling and why is it such a focus of concern inside the Beltway of Washington, D.C.?

Definition

Simply put, the debt ceiling is the limit on how much money the federal government may borrow.

First put in place during World War I, the policy gave the U.S. Treasury authorization to borrow money up to a set amount.

In the past century, Congress has voted to "lift" the debt ceiling 78 times under the auspices of presidents of both major political parties.

During the single term administration of former President Donald Trump from 2017 to 2021, who went on record during a town hall meeting Wednesday, May 10, opposing another lift, the debt ceiling was raised three times.

Trump's successor, President Joe Biden, wants the debt limit raised again with no preconditions.

House Republicans, led by Speaker Kevin McCarthy, will agree to a lift only if certain spending cuts are agreed to by the White House.

As of presstime, both sides appear to be at a stalemate.

According to an article at www.npr.org, the debt limit was last raised to $31.4 trillion, where it currently stands.

"Almost every year, the government spends more than it collects in taxes — that's the deficit. To make up the difference, (the government) borrows money, which accumulates over time. That's the debt," the National Public Radio piece explained.

Treasury Secretary Janet Yellen has warned the nation may go into default as soon as Thursday, June 1, unless a deal is reached as U.S. debt has risen nearly 400% over the last 20 years.

David Yaskewich

David Yaskewich

The Southeast Missourian asked David Yaskewich, chairman of the Department of Accounting, Finance and Economics at Southeast Missouri State University, to explain further the debt ceiling situation, which politicians increasing refer to as a "crisis."

"Economist" magazine wrote recently that "the world's biggest economy is flirting with an act of brazen irresponsibility, (namely) a sovereign default. The government has exhausted its statutory debt after which it will struggle to honor its obligations." Janet Yellen has said unless something is done, the government will run out of cash in June. Is that analysis on the money, in your opinion?

I think it is on the money. It is concerning that any organization, not just the federal government, would risk a default on its debt obligations. One concern is the overall health and the sustainability of the federal budget. If we were risking a default, we could see an impact on the government's credit rating. What's really at stake here is (even) higher interest rates on Treasury bonds and notes. Bottom line, if those rates go up, it'll make it more expensive to borrow money and to repay debt. I hope this is all posturing and that a default won't happen because if it does, the consequences would be serious.

Let's assume for a monent that agreement is not reached and the nation goes over the fiscal cliff and defaults. For everyday Americans, what does a default mean for them in their lives?

The average household should care greatly about this. If it happens, the ramifications will end up being discussed over the dinner table. I would tell Joe and Mary Sixpack, if we can use that identifier, the interest on the 10-year Treasury bond in particular, is a benchmark for other interest rates. Borrowing by businesses and borrowing by households will likely become more expensive. In the event of a default, you could expect the stock market to go down, too.

I agree with Yellen that in a default, you're not going to have enough money for every government obligation, so it's likely Social Security beneficiaries — for example — will see their payments delayed.

How critical is it that this situation is resolved?

It should be a top priority to avoid a default at all costs. A default would be uncharted territory for the U.S. Typically, we don't default on our debt, so it's hard to predict the magnitude of the impact.

Our government has raised the debt limit nearly 80 times since Dwight D. Eisenhower was president. Is there a financial reckoning coming at some point?

Debt, by itself, is not necessarily a bad thing. If our economy is increasing at a rate that exceeds the rate of debt growing, then debt wouldn't necessarily be problematic. On the other hand, persistently slower economic growth or persistently higher interest rates, could bring a reckoning, certainly a recession.

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