Over the last few months I've been gorgeous about many issues that are really important to the U.S. economy and, consequently, to our investments — even if you don't invest in the U.S. yet, what happens in the world's largest economy ends up spilling over into every other country.
Among the major events, we can highlight the breakdown of banks in the United States, economic indicators showing that the country's economy may in fact be slowing down and the commercial real estate sector with indications of problems.
But today I'm going to address a topic that may be larger than all of this put together: the American debt ceiling.
The U.S. debt ceiling returned to investors’ attention after the U.S. government reached its legal borrowing limit earlier this year. While there are steps the government can take to continue paying its obligations, they can only extend for a limited time.
Unless politicians come to an agreement, whether it be increasing, suspending or even eliminating the country's debt limit, the government may run out of money to pay its bills very soon.
There is no precise date on when this can happen, it all depends on how fast the government is issuing debt to cover its expenses and also how strong, or not, the fundraising goes. The best estimates from the banks of the foreigners point to mid-June as the limit for the American government to reach an agreement on this.
A failure by politicians to reach an agreement would have serious economic consequences, including the risk that the U.S. government will not pay its debt — the notorious default — which would be catastrophic for the country and the world.
The finances of a government
Everyone has bills to pay, and the federal government is not out of this.
The government generates its revenue through various taxes and uses that money to pay for everything from welfare, health care, military spending, education and other priorities set by Congress.
When the government collects enough revenue to cover its expenses, it generates a budget surplus. On the other hand, when it does not raise enough revenue to cover its obligations, it incurs a budget deficit.
In the last two decades, the United States government has had a budget deficit. In fiscal year 2022 alone, the U.S. government spent about $1.4 trillion more than it raised.
To cover this difference between what goes in (taxes paid by people and businesses) and what comes out (government spending), the U.S. Treasury Department is authorized to cover the deficit (expenses greater than revenues) by issuing new debts.
The cumulative amount of money the government has borrowed over time is called national debt. U.S. national debt has exploded in the last 20 years, from $6.4 trillion in 2003 to $31.4 trillion today, something like 130 percent of the country’s GDP.
The debt ceiling, its history and implications
The origins of the debt ceiling date back to 1917, when the U.S. was in the midst of World War I. The law was initially created to simplify the process of issuing debt to finance the war.
In 1939, Congress established a debt limit, which was increased or suspended over the years. Since the 1960s, the debt ceiling has been raised 78 times. The goal of the debt ceiling is to set a maximum amount of debt that the U.S. government can have open. Once the limit is reached, the federal government cannot increase the amount of outstanding debt until Congress authorizes a new debt limit or suspends it for a period of time.
Raising or suspending the debt ceiling has historically been somewhat commonplace, as politicians prefer a deal, as letting the United States default does not seem to be a good idea.
However, in recent years, the political debate on the subject has taken shape. The worst political confrontation, which brought the US to the brink of default, occurred in 2011. The chart below shows how the S&P500 Index behaved.
Over the last few months I've been gorgeous about many issues that are really important to the U.S. economy and, consequently, to our investments — even if you don't invest in the U.S. yet, what happens in the world's largest economy ends up spilling over into every other country.
Among the major events, we can highlight the breakdown of banks in the United States, economic indicators showing that the country's economy may in fact be slowing down and the commercial real estate sector with indications of problems.
But today I'm going to address a topic that may be larger than all of this put together: the American debt ceiling.
The U.S. debt ceiling returned to investors’ attention after the U.S. government reached its legal borrowing limit earlier this year. While there are steps the government can take to continue paying its obligations, they can only extend for a limited time.
Unless politicians come to an agreement, whether it be increasing, suspending or even eliminating the country's debt limit, the government may run out of money to pay its bills very soon.
There is no precise date on when this can happen, it all depends on how fast the government is issuing debt to cover its expenses and also how strong, or not, the fundraising goes. The best estimates from the banks of the foreigners point to mid-June as the limit for the American government to reach an agreement on this.
A failure by politicians to reach an agreement would have serious economic consequences, including the risk that the U.S. government will not pay its debt — the notorious default — which would be catastrophic for the country and the world.
The finances of a government
Everyone has bills to pay, and the federal government is not out of this.
The government generates its revenue through various taxes and uses that money to pay for everything from welfare, health care, military spending, education and other priorities set by Congress.
When the government collects enough revenue to cover its expenses, it generates a budget surplus. On the other hand, when it does not raise enough revenue to cover its obligations, it incurs a budget deficit.
In the last two decades, the United States government has had a budget deficit. In fiscal year 2022 alone, the U.S. government spent about $1.4 trillion more than it raised.
To cover this difference between what goes in (taxes paid by people and businesses) and what comes out (government spending), the U.S. Treasury Department is authorized to cover the deficit (expenses greater than revenues) by issuing new debts.
The cumulative amount of money the government has borrowed over time is called national debt. U.S. national debt has exploded in the last 20 years, from $6.4 trillion in 2003 to $31.4 trillion today, something like 130 percent of the country’s GDP.
