I still remember one of my High School teachers sharing with great glee that his teaching philosophy was that of the KISS method. The method stood for “Keep It Simple Stupid” and that phrase has never left my mind over the years. I love complex ideas and I desire to take those complex ideas and make them simple for people to understand. That’s my goal as a financial educator and coach. I have tried to adopt the KISS method for myself.
I have been thinking about writing about the debt ceiling for quite a while now. The topic is very complex and in my opinion, very multilayered. I have strong opinion on the topic. The issue that I have run into is finding a way to simplify the message and communicate my ideas. I’m going to finally take a stab at it.
If you turn on the news, there’s no doubt you will hear about the debate concerning the debt ceiling. I don’t really know if it would call it a debate as politics is mostly theatrics, but much of the news sources are portraying it as such. I’m hoping to cover three questions. Those questions are as follows:
What is the debt ceiling?
Why is this so important?
What’s are my thoughts on the debt ceiling?
What Is The Debt Ceiling?
The US government deals in a lot of debt. If you look at charts, you will see that in the last 50+ years the US has taken on an enormous amount of debt, and especially in the last 3 to 5 years. There are many reasons for that and it is hard for a lot of people to fully grasp, but the truth is the US economic system is built on debt.
Governments at every level run on debt. The US is no different. The US has a debt limit or legislative cap on the amount of debt that the US government is authorized to borrow. This concept of the legislative cap is what people refer to when they say the debt ceiling. Politicians are ultimately responsible for determining the legislative limit of how much debt the United States of America is able to borrow.
Why Is This So Important?
There’s three ways for governments to fund themselves. They are as follows:
Taxation
Money Printing
Debt
The US government is able to tax people but ultimately when you look at the federal budget there is no way that taxes alone are able to account for the entire budget. Money printing is obviously some thing that the Federal Reserve does and it’s a hidden tax on the public, but money creation almost always causes price inflation, which causes pain and suffering for the average person, which will cause politicians greater grief as public outcries grow from the pain of inflation. This leaves debt as third option. Debt becomes something governments use for funding the budget.
It seems like every couple years we hear about the House, Senate, and White House arguing about increasing the debt ceiling. This argument is built around the idea of increasing the debt ceiling to allow for more borrowing to fund the budget. In the simplest of terms, the US government cannot sustain itself with taxes alone or so they believe. This is why they argue over how much the limit should grow. I want you to read that last sentence over again a couple times. Very seldom do they argue about not increasing the limit. The two party system is really only arguing about how much the limit should go up. The reason this is important to the news media, talking heads, and politicians is because without debt as part of the funding formula there is no way for them to sustain the budget. They believe they need debt to survive.
What Are My Thoughts On The Debt Ceiling?
Government runs on debt. It’s become such a normal idea that very few people even question whether operating on debt is a good idea in the political landscape. I don’t talk about this a lot, but I served on my local City Council for three years. I am currently serving on my local County Board and have been for seven years. These two local units of government also operate on debt. I have seen firsthand how that is used as a means to maintain and grow governments ability to perform its tasks.
I have been a Budget Hawk in my roles in both the County and City. I really do feel that it is my responsibility to advocate for the taxpayer. The burden of the budget ultimately falls on the taxpayer. Government has the ability to borrow money and take on more debt. That debt must be paid back, and in order to pay it back taxes must be used to pay off the interest, and in theory ultimately the principal. I would often ask myself whether to borrow more money was in the best interest of the taxpayer? I often voted against borrowing because putting that debt on future generations seemed irresponsible to me. Many of my peers disagreed with me, so I was almost always in the minority.
I have a different view of debt maybe then others. I am not anti debt. I actually think there are times that debt makes a lot of sense. I will give you one example of when I think debt is incredibly useful. If you have the money to buy a business or home, but you choose to take advantage of a low interest rate to borrow money, there might be wisdom in taking on that debt. Businesses do this constantly. They have the reserves to buy something, choose instead to borrow and pay the debt of over time. There are also tax advantages to this, which is another reason why businesses do this often. This is just one example of when debt could make sense.
This is not how the US government operates though. They do not have the money in reserves. Instead they are going into debt in order to operate. This to me is extremely foolish. Businesses that operate this way, usually either end in bankruptcy, or the government will come in and bail them out because “they are too big to fail”.
Many personal financial guru types will tell you not to take on consumer debt in order to live. The idea is to live within your means. There’s wisdom in the idea that they are promoting. The US government doesn’t understand or care to live by that model. They live with the mindset that they must borrow to survive.
It is my opinion that ultimately they are in a no-win scenario. They can default on the debt, but there would be many consequences to those actions and most of them result in geopolitical turmoil. The other option is to keep raising the legislative limit on the amount of debt, but by doing that they continue to make it unsustainable. They can’t win. They have put the American people in a no-win scenario.
I still remember that as a child my mother would often remind me before going to school that my actions have rewards or consequences and to be careful of how I act. I don’t think that I truly understood the profound wisdom of that idea until much later in my adulthood. Our actions create clear consequences or they can create clear rewards. I am trying to teach this idea to my children.
What will they do? That’s the million dollar question. I will give you my theory. I think in the short term they will continue to play theatrics and argue over how high the debt limit should increase. I think in the long term they will default on the debt, but as I said, I think there’s many consequences geopolitically if or when that happens.
The problem is the US government over centuries of borrowing has created a house of cards. The house of cards could collapse at any time. I do not believe they have the ability to salvage the situation. It’s ultimately become a game, and as I said, politics is often theatrics, so the public is led to believe that debt is necessary, but we should fight over how much of a limit of debt we take on. My fear is we don’t see the true consequence of the continual action of making debt part of a funding formula. That’s never a good idea. If you look at history, you will see that many great empires fell because of unsustainable debt among other reasons.
I have given you both of my short-term and long-term theories. I’ve also given you a lot of my thoughts behind the principle of debt. I think in the end what is to come may very well be inevitable. I think the process of how we get there will be extremely difficult.
I think between debt, taxes, and inflation the American people could enter a season of great financial turmoil. I think no matter what happens with the debt ceiling the house of cards is becoming too large. I hope that I’m wrong. I think the next Great Depression could happen soon and most people aren’t ready for it. I’m preparing for it with my family. I hope you are too.