Hitting the Ceiling

By Stephen Bennie

Right now, it’s likely that investment news channels are still talking about the US debt ceiling crisis. It makes for sensational headlines. What would happen if the US defaulted on its Treasury bonds? No one knows for sure because its never happened. But no comments I’ve read suggest it would be a positive event. Rather, the chatter is much more about what a catastrophe it would be, a veritable financial apocalypse. As media loves jamming bad news our way, the scarier the better, the US debt ceiling is getting a lot of attention. So, I thought it might be useful to take a step back and go through what is the debt ceiling and how does it actually work.

The first requirement of a debt ceiling is to have debt. The US has debt because most years its Federal Government’s spending exceeds its revenue. Since its inception the US has needed to borrow, at the end of the American Revolutionary War in 1791 it had outstanding debt of 75m¹. At that time the debt was mainly owed to France who were well into their Second Hundred Years’ War with Britain and were more than happy to help fund an enemy of their enemy. Incidentally that relationship was instrumental in the French sending the Statue of Liberty to New York as a symbol of their important relationship.

Since those times the US debt has increased, and they borrow from a much wider set of countries and institutions. In fact, it borrows a very large amount of money, US national debt currently sits at $31.45 trillion². The chart below shows the incredible growth in US debt levels over the past 100 years. It’s not often you see a debt level chart that makes Ryman Healthcare look like cautious managers of debt. The mind-blowing part of the chart below is that it is inflation adjusted.