The U.S. Faces a Major Debt Problem

I just got off the phone with the president. I talked to him twice today, and after weeks of negotiations, we have come to an agreement in principle. This is House Speaker Kevin McCarthy explaining to the media that finally the Republicans and the Democrats have come to an agreement in principle that will allow the U.S. debt ceiling to be raised, thus avoiding a default on U.S. government bonds and, more importantly, the collapse of the global financial system.

This comes after Treasury Secretary Janet Yellen earlier this year warned that the U.S. would officially run out of money on June the first if nothing was done. However, the House is now expected to vote on a bill on Wednesday this week that will finally get the debt ceiling raised. As you heard in the previous clip, overall it's a pretty bizarre situation where, because of one little rule, the financial health of the entire world is essentially juggled around in a giant game of political chicken.

So in this video, let's dissect what's currently going on right now in the U.S. and how on Earth a situation like this is even possible in 2023.

Thank you. So first, let's talk about the debt ceiling. This is quite simply a cap on how much debt the U.S. government can accumulate. A government brings in money with tax revenue, and then they spend money on healthcare, roads, schools, and other infrastructure: Social Security, the military, a whole bunch of other stuff. If you spend less than you earn, well, you have a surplus. But that really doesn't tend to happen; usually, governments spend a fair amount more than they earn. And you guessed it, the difference is covered by the government taking on debt.

How they do this is they issue bonds, which each represent tiny little loans given to the government by investors. The government thus gets the money up front, and at the bond's maturity date, the investor will be paid back their loan money plus interest called a coupon. Now, as you're probably aware, the U.S. has spent a lot more than it's earned for a very long time and has accumulated a monstrous national debt of, get this, 31.46 trillion dollars, which is right on the debt limit.

This legal limit does get reviewed by Congress from time to time, but if the government wants to spend more than the cap, a raise in the ceiling does need to be approved by Congress, and this is where the problems arise. But more on that in a minute. Now, the debt ceiling was first introduced in the United States back in 1917 as a part of the Second Liberty Bond Act. The idea was that instead of Congress having to approve every single instance of the federal government issuing new debt, the simple debt cap idea would allow the Treasury to issue bonds as they needed for whatever they needed as long as they then didn't go above that agreed-upon limit.

Instead of stamping every single little bond issuance, everybody could instead get on with their jobs, and Congress could be freed up to do other stuff, like getting back to their big name-calling contest. Then, occasionally, everybody would come back, reassess the debt situation, and raise the ceiling as needed. All they needed was one stamp of approval from Congress every so often. Good idea in principle, and it worked pretty smoothly for a very long time. In fact, since 1960, the government has raised the debt ceiling 78 times.

Now, how many of those do you remember hearing about on the news? Exactly. It's really been in the last few years that we've started seeing this debt ceiling become a much bigger issue because the increases have been larger, and mainly because politicians have started using it as leverage. You see, the consequence of the U.S. not being able to raise the debt ceiling as it needs is unfortunately very severe. The government has financial obligations it needs to meet, and it does need to take on debt to meet them.

They have people that rely on Social Security payments. They have military personnel that need their paychecks. They have investors that have put their faith in the U.S. economy that need to be paid back. And because the U.S. is the central pillar of the global economy, if they become unable to pay their debts for whatever reason, this would trigger a cascade of events that would collapse the global financial system. Even by the White House's own admission, a breach of the U.S. debt ceiling would cause severe damage to the U.S. economy, with estimates that the stock market could lose as much as 45% in a single quarter, with job losses estimated at almost 8 million.

And that's just the U.S. This is obviously a catastrophic price to pay for a little raise in the debt ceiling failing to get through Congress. So naturally, the government really, really wants the debt limit raised to happen, which gives the opposing party huge leverage. If the government doesn't hold a majority, for example, in 2011, Republicans forced President Obama into a 38.5 billion dollar budget cut in order to get the debt ceiling raised. In 2017, it was the Democrats that used this strategy to force Donald Trump to commit 15 billion dollars to disaster relief aid.

Now in 2023, we're seeing a similar situation happening again. As we know, since the 2022 midterms, the Republicans have taken control of the House, which means if the Democrats want to get the debt ceiling raised, you guessed it, they need to negotiate, and that's what we're seeing play out right now.

You might remember on January 19th of this year, the United States actually already hit the debt ceiling of 31.4 trillion, and since that time, there's been a lot of back and forth between the two parties to negotiate a debt increase as the Treasury desperately shuffles money around to keep paying their bills. But as I mentioned earlier, in May, Treasury Secretary Janet Yellen warned that June the first was a hard deadline when the U.S. really does run out of money.

Now she later revised that to June the 5th, but will obviously, it's not much of an extension. So now it's really crunch time, and with the deadline less than a week away, the Democrats and Republicans really do need to come to an agreement or all hell breaks loose in the global financial system. Cue the game of political chicken.

In April, House Republicans passed the Limit, Save, Grow Act, which is a bill that would allow the debt ceiling to be raised by 1.5 trillion dollars. Sounds good, right? Well, in that bill, as you might expect, were also plenty of sweeteners for the Republican Party; sweeteners that Joe Biden was not very happy about. Namely, the bill would lower government spending by 4.5 trillion dollars over a decade through 4 trillion dollars worth of policy savings and 500 billion dollars worth of interest savings.

Now that's something Joe Biden and the Democrats don't want to do. So initially, Biden straight out refused to negotiate. "I don't know what he thinks," McCarthy speaking. "I think he knows better. I think he knows that default would be disastrous, and I think he knows what he's passed could not possibly pass anywhere in Congress. It's dead on arrival."

But of course, as the deadline drew closer and closer, obviously the two parties needed to get this thing done. So little by little, meeting by meeting, the president started to soften to the idea of negotiation. This is what he said at the G7 summit in Japan a little over a week ago: “I've done my part. We put forward a proposal to cut spending by more than a trillion dollars on top of the nearly three trillion dollars in deficit reduction that I previously proposed through the combination of spending cuts and new revenues. Now it's time for the other side to move third from their extreme positions because much of what they've already proposed is simply, quite frankly, unacceptable."

But while this indicated that the president was willing to negotiate, there were still a few problems: the two parties hadn't actually agreed on anything; those terms hadn't been through Congress, and the biggest problem: the deadline was fast approaching. And that's why so many people's ears poked up when they heard House Speaker Kevin McCarthy say this over the weekend: “I just got off the phone with the president. I talked to him twice today, and after weeks of negotiations, we have come to an agreement in principle. We still have a lot of work to do, but I believe this is an agreement in principle that’s worthy of the American people.”

With just a week left before the deadline, it seems as though President Biden and Speaker McCarthy have come to an agreement to raise the debt ceiling. We react: “Good news! We've got a just focus. Speaker McCarthy and we've reached the bipartisan budget agreement. Now we're ready to move to the full Congress, and it takes a threat of catastrophic to fall off the table, protects our hard-earned and historic economic recovery. The agreement also represents the compromises. It means no one got everything they want."

So this is without a doubt a very important step forward for the debt ceiling to finally be raised. But of course, it's not the end of the road. The next step now is that the bill actually has to be taken to Congress, which is scheduled for Wednesday this week, and then they do actually have to pass it. But certainly, the optimist will say at least they now have something that both sides might be willing to agree to.

In just the last day or so, we've now actually been able to see some of the major points of the bill. As NBC News notes, the core of the deal is the suspension of the debt ceiling currently at 31.4 trillion until January 1st, 2025. But it also includes some of those Republican sweeteners that we were discussing earlier. The agreement would keep non-defense spending roughly flat in the 2024 fiscal year and would increase it by one percent in the following year.

Then for the next fiscal year, the bill matches Biden's proposed defense budget of 886 billion. It would also restart federal student loan payments after a pause that began at the start of the pandemic. The agreement would also rescind about 30 billion in unspent coronavirus relief money that Congress approved through previous bills. Republicans also targeted money that the IRS was allotted last year to crack down on tax fraud, so the bill bites into some of the IRS funding, sending 1.4 billion dollars.

The agreement would also expand work requirements for the supplemental nutrition assistance program known as food stamps. So that's the general gist of it: the Democrats get the debt ceiling suspended, and the Republicans get some spending cuts. So it seems like there is light at the end of the tunnel.

But for the last part of the video, I wanted to talk about whether it was even a possibility that the debt ceiling wasn't going to be raised. And while you can never say things for certain these days, probabilistically this was always very likely to get done. Despite what you might have seen in the media, and the reason for this is because the consequence of the U.S. defaulting is just so severe for America.

I mean really, this would have been like having an argument with your best friend who you live with and deciding to, instead of just talking things out, you just blow up your house. I mean, you're just not going to do that. That's what America would essentially be doing by not increasing the debt ceiling. It would be turning something trivial into a major catastrophe.

As you guys know, I love to listen to the wise words of Warren Buffett, the world's most honorable capitalist. He knows a thing or two about economics, and this is what he had to say on the issue about a month or so ago: "The messaging has been very poor. It's been poor by the politicians, who sometimes have an interest in having it poor. It's been poor by the agencies, and I'd say it's been poor by the press. I mean, you shouldn't have so many people that misunderstand the fact that although there may be a debt ceiling, it's going to get changed."

That's really the sad thing about this whole situation with the current political environment over in America. You know, politicians know fully well that they are going to raise the debt ceiling, but as everything is so politicized these days, they're willing to push things further and further. And as we've seen with this debt ceiling bill, it looks like it's going to come down to the absolute wire.

And of course, you can guarantee each party is going to blame the other side for the hold up. It's just a huge game of political chicken, but I don't think anybody likes to see it happen. I don't like to see it happen. I'm not even American. But then that raises one final question, which is, well, does the U.S. actually need a debt ceiling if this is what it causes?

Now, many people will bite back at that viewpoint and say, well, come on now, if there were no debt ceiling, then the U.S. debt would just run absolutely out of control. It would be monstrous. But also, while I understand that sentiment, ask yourself: has the debt ceiling actually stopped those things from already happening? It's also worth noting that the U.S. is pretty much the only country with a debt ceiling. Well, it's them and Denmark, and surprisingly this hasn't really been an issue for any other country. You don't see the rest of the world crashing and burning, right?

So with those things in mind, I'd love to hear from you. Do you think the U.S. should just ditch its debt ceiling? Please let me know down in the comments below. But with that said, guys, thanks very much for watching! Leave a like on the video if you did enjoy it, and I'll see you guys in the next one.