As the debate over whether the U.S. government should increase
its borrowing capacity reaches a fever pitch, we offer a cheat
sheet for readers to better understand the facts and
fiction behind the debt limit.
What is the debt limit?
The debt limit is the total amount of money that the U.S.
government is authorized to borrow to meet its existing legal
obligations, including Social Security and Medicare benefits,
military salaries, interest on the national debt, tax refunds, and
other payments. The debt limit does not authorize new spending
commitments. It simply allows the government to finance existing
legal obligations that Congresses and presidents of both parties
have made in the past.
How much is the debt limit?
Currently, $16.4 trillion is the debt limit and this threshold
was reached at the end of December 2012.
When was the last time the debt limit was
raised?
On August 1, 2011 was the most recent occurrence of a debt limit
increase. A few days later, Standard & Poor's downgraded the
U.S. government's credit rating from AAA to AA+. Prior to August
2011, the debt ceiling was last increased on February 12, 2010 to
$14.294 trillion.
What happens if Congress doesn't increase the debt
ceiling?
If Congress fails to increase the debt limit, it would cause the
government to default on its legal obligations - an unprecedented
event in American history. The government would have to stop,
limit, or delay payments on a broad range of legal obligations,
including Social Security and Medicare benefits, military salaries,
interest on the national debt, tax refunds, and many other
commitments.
Isn't the Federal Reserve monetizing the entire budget
deficit?
No. The monetary base has been flat for the past 18 months,
according to Economist Mike Darda of MKM Partners. "You cannot
monetize debt if the central bank is not, on net, accumulating
assets."
Can the U.S. Treasury monetize its gold assets?
According to the U.S. Mint, the government holds 147.3 million
ounces of gold (NYSEARCA:GLD). Certain legal
experts have argued the U.S. Treasury Secretary is authorized to
monetize gold assets. They cite similar actions by the Eisenhower
Administration during the 1950s. The gold is held by the U.S.
government at book value of $42.22 per ounce.
Why can't a trillion dollar coin be issued to purchase
debt?
The law does not restrict the U.S. Mint, at the direction of the
Treasury Secretary, from creating platinum (NYSEARCA:PPLT) coins
with an arbitrary value. And pundits have suggested a trillion
dollar coin could be minted and deposited with the Federal Reserve
and used to repurchase debt, thereby freeing up funds. However,
such a move could put the credibility of the government's
creditworthiness at risk if the bond market interprets this
strategy as a default. The "trillion dollar coin" idea was
originally floated by a financial blogger as a joke.
Does the U.S. Treasury have authority to tap government
pension funds?
Yes. The government has already begun to borrow from the federal
employee pension fund to avoid exceeding its debt borrowing limit.
According to U.S. Treasury Secretary Tim Geithner, the move will
make $156 billion in borrowing capacity available. In a letter to
Congress, Geithner said the funds removed from the pension account
will be replaced after the borrowing limit is raised.
How did U.S. Treasuries react to the last debt limit
increase?
In 2011, long term U.S. Treasury
ETFs
(NYSEARCA:TLT) with durations of 20+ years gained 33.96% in value,
virtually matching their gains during the 2008 credit crisis.
Intermediate term U.S. Treasuries with 7-10 durations
(NYSEARCA:IEF) gained 15.64% in 2011.
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