What's the deal with the debt ceiling?

people don't understand what I understand. But I think if you were like me before, you probably didn't know what the death ceiling was. And it's really not that difficult. I mean, yeah, I had an idea what the death ceiling was. It certainly didn't understand the nuts and bolts of it. And I also didn't understand that it's fairly straightforward the whole thing, yeah, or that our company or company, how's that proportian slip our country? The way they do

business is just it's it's kind of staggered. Oh, it's an enormous shell game. It's pretty weird that's being held together with duct tape and bubble gum. It's disheartening and

frightening and all that stuff. So um chuck. The debt ceiling has been around for a while, and we'll talk about the history of it in a little while, But um, it really kind of came into focus in two thousand eleven there was a big fight over raising the debt ceiling, which to that point had happened more than a hundred times since the beginning of the twentieth century UM, and it had been routine at any given point in time, like it was just that ceiling needs to be raised,

Congress says, okay, raise it, and that's that. In two eleven UM, thanks to a faction of the Republican Party known as the Tea Party, the this very normal procedure or routine i should say procedure of raising the death ceiling was basically like held up and the therefore the function of government was basically held hostage. And it happened again in two thousand thirteen to even greater effect. But um,

what's crazy to me? After understanding and investigating what the debt ceiling is and what's going on, I'm chilled to say that I understand it from both sides now, Like I get where both sides are coming from and why the debt ceiling is this. It is literally the full chrome on which the entire federal government, the entire country, and not just the operations of the government, but the whole U. S economy, and in turn, the global economy sits rests. And if you hold up the debt ceiling,

you hold the entire global economy hostage. If you hold up the process of raising the debt ceiling, yes, yeah, you might hold it up like a buttress. If you hold yes, if you're doing that, then your back hurts. But that's that's the point. That's why it was pretty shrewd to target the debt ceiling. But it's not just shrewdness. Like I I understand that the people who held it

up were characterized as political terrorists. I think even if you take that aside or not, like, it was pretty smart that to target that, not just because that's a great thing to hold hostage, but because you can make a case like they're in is the greatest symbol or functional symbol of all of the problems that are plaguing the United States today or the solution to all of its problems. Man, you are right down the middle on this one, aren't you. I I truly understand it from

both sides. It's really weird. I think that's a healthy perspective. I guess so, and maybe that's what it is. I'm like, well, I feel healthy, healthy perspective. Uh yeah, it definitely beats uh, hardline partisan views on things. I think when it comes to something this huge and complicated, Well, the irony is that the people who were holding it up or about his hardline partisans as you can get you know. Yeah, but the prospect of attacking the debt ceiling and focusing

light on it is I think a very smart move politically. Yeah. So it may not make friends on the playground, No, it definitely will not. It is effective. Yeah, okay, so Chuck, let's talk about this. Let's talk about the debts. Let's talk about the federal government in general and how it operates. Yeah. There's a thing that I didn't know exist until recently. Um, that is issued every day called the Daily Treasury Statement.

And if while we're doing this, this sounds just like a company or just like given your own personal finance, as as it is, it's just a large a lot more zeros, a lot more zeros. But it's the principles the exact same. Yeah. Um, the daily Treasury statement is basically just the balance sheet of what we spend in a day as a government and what we take in in a day. So let's just pick a day at random that's featured in this article. Okay, let's say October. Okay,

October three of last year, not too long ago. It's a third a The sun was shining here in Atlanta. The federal government took in about a hundred and ten billion and revenue. We were in Los Angeles. Yeah, the sun was shining there. Took it in about a hundred and ten billion dollars from things like massive amounts of taxes that we have to pay my words, bailout loan payments from tarp uh selling old jet planes and things and guns to other countries, about twenty seven million dollars

made on that day alone. Uh. And then we spent a hundred and forty three billion dollars. So if we took in a hundred and ten and we spent a hundred and forty three billions, and we spent a hundred and forty three on hundreds, if not thousands, of programs just all sorts of everything from Social Security to think made up the lions share of the the spending that day, which was billion um down to tax refunds and not just programs, but like you know, the electric bill at

the White House, right exactly, paying the private in the army. Yes, like you know, everything the government pays for, which includes a lot of programs. Uh. So that is a difference of thirty three billion dollars in that one day, A bad a negative difference, right, So that's a deficit we ran on that day. We ran a deficit, which is

not unusual. Thirty three billion dollar deficit on October three. Okay, So the rest of the three d and sixty four days of that year fiscal or otherwise calendar, even if we didn't let's say we had a day where we ran a surplus. Um. You take all of those together, You take your surpluses and your deficits for all those days, and you add them up, and you have whether you

have a surplus or a deficit for the year. If everything equals out, you have what's called the balanced budget for that year, which is just doesn't happen, not not very frequently. No, I don't see I haven't seen any balance. I've seen like for the most part, though, we've been in a death sit especially since um, well for many many years. Well I've got some numbers actually, uh in and this I'm not saying this president is good. This president is bad because Congress in the House have probably

more to do with it than the president does. Well. Not only that, it's possible some presidents have inherited the the benefits of policies from other presidents, like economists don't know. Yeah, like it very contentious to man when people start I read a few articles. It's really pretty interesting to see people's takes on the economies of the presidency. But in ninete, regardless, uh, Bill Clinton inherited a two hundred and fifty five billion

dollar deficit. Uh. In two starting, we had the first budget surplus since nineteen sixty nine, and then two years later in two thousand, we hit the high water mark of two hundred already six billion dollars surplus in two thousand. I mean, that's mind boggling these days. Yeah, man, to think about that. That means that the government, after paying all of its bills, still had two hundred and thirty

six billion dollars left over. Yeah. And and people today still are like Clinton got lucky because the internet boom or no. Clinton's policies were wide or no, it was the Republican controlled house in Congress that forced him. It was it was kind of a lot of stuff. I think the rational approaches, There was a lot of stuff. Regardless, those were great years. Uh. And then so in two

thousand and two hundred thirty six billion dollars surplus. Clinton left office with a hundred and twenty seven billion dollars surplus, and just a year later we had a hundred and fifty seven billion dollar deficit. And by the time Obama came into office in two thousand nine, we had a one point two trillion dollar deficit when he came into office. Yes, and now it's at about seven fifty nine billion, depending on what numbers you look at. That's just the deficit,

not the national debt. Okay, all right, So this is this is a very big point of um clarification that we need to make. That's the annual budget, right, Yeah, that's the deficit. Now, when you take all of those annual budgets over all the years, all the money we've ever owed, all the money we've ever came out on top with, come out on top with, and you put it all together, you have what's called the national debt. Yeah, that's basically the money we borrow to cover those losses.

If if we ever had if you ever took all of those years together and we had a surplus, then you would call it the national surplus. I don't think that's ever happened, or ever will happen. I don't think that's ever happened. Yeah, since we started borrowing money, even though we've had budget surpluses, right, because let's say we've we've had a good year two fifty billion dollars surp us year. That's a great year, but we also maybe had five trillion dollars in national debt that that had

to be thrown at. Right, So, when you take all of those deficits, in all the surpluses, and you add them all together, what you come up with is how much in the hole the United States is, and that is the national debt. And as it stands right now, it's add about seventeen trillion, two hundred and eighty two billion, five hundred and seventy five million, zero forty four thousand, seven hundred and fifty five dollars and thirty five cents.

That's as of January two thousand, fourteen, and with every minute getting more and more so it's tired now than it was when you read it, which is a pretty significant amount, especially if you consider that in two thousand it was at about five trillion. Yeah, you know a number is bad when you have to look at it from right to left and counting to zeros, like I gotta see what the thousands of millions of billions? Okay, oh that's trillions. Yeah, so if you if you think

about that, I mean, think about that, chuck in. In just fourteen years, like we've gone up well over twelve trillion dollars in debt, twelve trillion dollars, our national debt has increased by that much. And so now we kind of come to my intro again, if you'll indulge me for a second, if you look at the increase. Right, of course, there were there were two wars that we fought there EXPI that definitely did that didn't help anything at all. Like it started, Flint was not at war.

So that was a lot of people to say, you know, those were eight peaceful years. I think they call it a piece okay, Yeah. Clayton preferred the surgical um air strike. That was his big thing, rather than troops and relying on though. Um. But it was so wars they cost quite a bit of money, so we were fighting not one, but two wars. Then all of a sudden you have

the global markets just go into the toilet. And now all of a sudden, you have a lot of people who are unemployed, which means your tax revenue goes down, and you have in the in the office a president who believes in spending your way out of a crisis, a debt crisis. And this is why the Tea Party hijacked the the debt ceiling because a lot of people are saying, we don't agree with you. There's a lot of people who believe in austerity, which is you cut

government spending to get your way out of a crisis. Um. And if you look at Greece, that pretty much proved that you can't do that, that it will just completely

destroy your economy and possibly your entire government. And that was actually based on a paper by a couple of economists, um who came out with this data that any government whose debt to income ratio was if your debt was you GDP, you didn't grow as fast and so all of a sudden you had all these people saying austerity, austerity, And then it turned out that this grad student from I believe m y u Um got ahold of the original data set and basically saw that they didn't carry

like a zero and got an incorrect thing. And the the government of Greece almost toppled because of this incorrect paper. Yeah, but at the time, there are a lot of people saying, well, first of all, we don't agree with deficit spending as a means of getting out of an economic problem. Um. But also you have some other people saying we maybe that works, maybe it doesn't. History hasn't proven that yet.

We still think as twelve trillion dollar increase in the national deficit is too much, so we need to curb this runaways spending. And one way to do that is to target the debt ceiling. Yeah, and debt ceiling, I don't even think we've even said specifically, is basically the maximum amount of of deficit that we can incur. And we literally it's got a ceiling. When we borrow or when we have a deficit that hits that, we're at

the debt ceiling. And the only way to to change that is, uh for Congress, like we said, to to raise the debt ceiling, which has happened, Um, how many times I think at least a hundred times since it started. Well, since nineteen sixty they voted seventy eight times. So let's call that modern times. Yeah, because okay, So, no matter what your politics are, no matter what's going on, no matter whose president, this is the way the federal government is set up. You have a bunch of money going out.

You have a bunch of money coming in, usually in the form of income tax or like you said, selling old fighter jets or that kind of thing. Um, And the amount you have coming in very very rarely seeds the amount you're putting out. So there's two things you can do. You can increase your income, or you can cut your spending and raise taxes right so, um the well, increasing income by raising taxes right exactly, or you can

cut your spending. We have two political parties. One is completely attached to not increasing taxes, the other one is completely attached to not cutting spending, especially on entitlement programs. So it doesn't matter who's in office these days. The way that things operate is you just go borrow more money. That's how you fund the government. That's how it's been done,

that's how you've gotten around the politics to this point. Yeah, and we could, you know, Congress could erase that, you know by like you said, raising taxes that's not popular, or cutting spending and that that's not popular. So it's really kind of a bad situation. So what we have is the U. S. Treasury, which issues death that's right, US Treasury securities to people regular old schmos. Well not regular lord schmos. No, we can well, that's true, that's true.

You can go buy a US Treasury bond, banks, corporations, governments. UM. It's basically a very low interest rate loan and uh, you know, up until recently a very very safe one, right, and you would still think it's pretty safe. But you know, that could go off the cliff. It could. And that was the big problem in October of two thousand thirteen is a lot of people were saying, like, um, we're

gonna default on our loan obligations. Yeah, we'll get to that though, because that's the bad news at the end. This is the bad news in the middle. Uh, China and Japan, for instance, UM each owned more than a trillion dollars in Treasury securities as of July last year, So a lot of people borrow money from the United States at pretty low rates. I think it's it's worth explaining again, like a Treasury bond, is you chuck going to buy going to the U. S. Government saying here,

I'll give you some money. You give me a promisory note that says you'll repay it with a little bit extra big right at the at the end when this thing matures, and the government says, thanks, we're gonna take this money and we're going to use it to pay our bills. Because Congress is going over and saying, yes, we want to keep our national parks open, and we want to um, we want to fund um like security whatever, um. And we have bills to pay. So thanks for the money.

We're gonna pay the bills because that's what Treasury does. Congress spend the money. Treasury pays the money, and if you're under that ceiling, then it's it's it's all good. Yeah, it's fine, just figure out a way to pay the bills. And it's just like a big company. And Treasury also has more than one financial security. They have all sorts of ones that different that mature at different times and all that, and um, they do a pretty good job

of figuring out how to raise money. But the problem is for every Treasury bill that they sell, Chuck, that's that much more in debt. The federal government has just gone yeah, okay with the debt ceiling. Like you said, there is a certain limit to the amount of outstanding debt the Treasury Department can issue, and it's just like a credit card limit to an extent. Yeah, there's there's one pretty big difference is um. But it is a helpful way to think about it because most people have

credit cards. But the bank sets your credit card limit because they say, Josh, you know you're risky as a spender. We don't want to give you a credit card more than like Tim Grant. Let's say, yeah, so the bank puts the cap on it. There. Um. On the other side of the coin, foreign governments that by treasury securities are like, I'll take all you got basically, so it's a reliable investment. And the credit limit is imposed by the borrow instead of the lender. Right, that's the big

difference with with your credit card. It's the person lending you the money that wants to say that that says no, you can't borrow anymore. With the debt ceiling, it's us saying no, we can't. We can't go borrow anymore. We could issue as much as we wanted, and people would buy teabills all day long because they're so safe. That's right,

supposedly or at the moment they are. All right, you want to talk about the history a little bit, Well, hold one, before we talk history, let's do a message break real quick, okay, And now we are talking about the history of the death ceiling, right. I think that's where we left off. Back in the day, UM, Congress used to be a little tighter with this, a lot tighter. In fact, we could not sell securities without explicit approval.

UH Treasury wanted to borrow some money, so Congress would say, Hey, what kind of security should we sell? Large or small? What should the interest rate be? Um? How many should

we sell? And they kind of worked it out that way up until UH war In War Revenue Act of basically said, you know what, in times of war, we need to loosen the chains a little bit, and let's say we can borrow up to five hundred million dollars by some of these securities to fund the Spanish American War, right, And then after that they were like, okay, that worked,

but let's just leave that be. And then there was World War One, and there was the First and Second Liberty Bonds Acts, which basically did the same thing to help fund World War One, and it worked really well. And the secretaries of the Treasury, um, I think Andrew Carnegie Mellon. Andrew Mellon, Yeah, you can understand why I would be confused there, um. And Henry Morgan Thou later on in the nineteen twenties and thirties basically said why not just do this to fund the government as as

a whole instead of just in times of war? And now today, if you could go back and sit down with him, you could say, because it gets out of control when you do, because it's right. Um. But they got uh was it Franklin? Yeah, fdr Yeah, they got Roosevelt on on board, and they got Congress to pass this for the first time ever, an aggregate debt limit, which is all the debts that the U s ode as long as it was beneath a certain amount um.

The Treasury could do whatever it wanted to pay its bills as long as it didn't need to borrow any more than that. And that was the first time that a debt ceiling was ever set in nine I think, yeah, thirty nine, and that was It's pretty similar to kind of the debt ceiling that we have today. Not too different. Uh, Congress approved spending. Treasury figures out how to pay for it all. As long as you're under that, it's all good.

The problem is when you bump up against it, like we've been doing over and over again lately, it seems like, yeah, so, like you said, that is a problem, you just vote to raise it. Yes, and again. This has been pretty routine. You know, a hundred times since the the the nineteen thirties, a hundred times these things been lifted. Um, and you just say, okay, well, just go issue some more debt. People want the debt, people want to lend us money, So go issue some more debt and we can keep

paying our bills. Because here's the thing with the debt ceiling. When you raise the debt ceiling, a lot of people are like, well, if you don't raise the debt ceiling, it curbs spending. That's true. Indirectly, what the Treasury is doing is paying for stuff that we've already received on credit, whether it's you know, meals for soldiers from a private contractor to you know, a bunch of like Boeing jets, whatever, We've already received these things, and now Treasury has to pay.

So if if you don't extend the debt ceiling, then you're defaulting on uh payments. You have to make bills, you have to pay, just like you your credit card exactly. And that's not good. And it's kind of the same thing happens really if we default. Uh, Well, here's what happens.

If we don't raise the debt ceiling and we are in danger of defaulting, we uh defaulting would basically start raising all other interest rates across the board, well, the Marke loan rates, UH, basically anything your average Joe would go and get alone for your your rates are going to go up, right, And the reason why is because the ten year Treasury note um is what the home

loan rates are tied to. And if the value or the credit rating of a T bill goes down, then the people who are lending money and return for a T bill are going to be able to say, like, yeah, I'll give you some money, but you're a little more risky than you were before. So I want to hire percentage rate and interest, which means it's more expensive for

the government to borrow money. And if the percentage of interest goes up on the T bill, anything that's attached to that, like home loans, business loans go up as well, which means what well, that means everybody suffers and the whole country goes into an economic drag and maybe even worse. Yeah, it could get a lot worse. Did you see that that thing I sent to you from Forbes. Yeah, so a lot of people were saying in October, like, oh, going over defaulting on our debt, that's not that big

of a deal. You know, it's a colossal deal. It doesn't matter what your politics are. One thing could happen is we could actually lose our credit triple a credit rating, which would be horrible. It would be horrible because people who buy TEA bills would be able to say, I want to hire interest, right, yeah, they still want to borrow the money. They would just stick it to us,

right right. But the thing is to make it more attractive because fewer people would want to borrow money, so to make it more attractive, the government would have to raise interest rate on what it paid back. Right um, Also the T bills. If everything just went off the cliff and and the government said, you know what, we can't pay back this debt, any T bill you hold

would be as valueless as any other T bill. No one would know what they were maybe going to eventually repay what was worth what they so they would all in effect become worthless. The problem is not only do entire federal govern or foreign governments rely on tea bills for you know, their reserves, so do banks. Banks also used T bills as collateral for overnight loans. Sometimes companies cash them in because they need to be more liquid. Right So, there's a lot of use of T bills

that's totally entrenched in the economy. And if all of a sudden they went valueless because the government defaulted on its loans obligations on its debt, then that would be that like the the entire banking system would lose at least a third of its collateral it's it's reserves, and they would actually probably be hold holding these things illegally so they'd have to get rid of them, so they'd be selling these things off for whatever they could, and

a genuine collapse of the markets. Whereas this Ford writer puts it, um it would make the what happened in two thousand and eight after the Lehman debacle look like a children's exercise. It would be catastrophic cats and dogs living together. And that's really not hyperbole, Like that's obviously the worst case scenario. But the point is these T bills are so entrenched in the global economy. They'd just be if they became valueless, so too would the global economy. Yeah,

I wonder how you regain your credit rating. I don't know, sure, it's probably much the same as an individual, you know. Uh So, one thing that would happen if we decided not to raise the debt ceiling is Congress would have to operate within a budget, which means the things that we were talking about before, like huge spinning cuts or raising taxes both probably or both. And that's just tricky politics. People would get upset, like what programs do you cut?

Whose taxes do you raise? It's just a very dangerous game. They'd be very very deep cuts too. Yeah, and the problem is is any time, um, the federal government makes huge cuts so to do corporations, and then all of a sudden, unemployment goes up, so you have to raise taxes even further because there's fewer people who are employed paying taxes, and or they may fall onto the teeth

of the government as well. Yeah, because they're unemployed. Yeah. Man, should we be worried, No, because they're going to vote to raise the dead every time. Yeah, there's no way that they would ever default. It would just be too again, catastrophically bad. Yeah. I think though, you can be worried about continuing on like this. Yeah, I mean that has to pay. Uh, you gotta pay it at some point down the road. Yeah. You know. Um, there was one thing we didn't quite touch on that I think really

kind of reveals just what a big shell game this is. Right. So, again, if you don't want to raise taxes and you don't want to cut um programs, you just go to the treasury to get more money. Well, if the treasury doesn't have that much more money, you can also go to your own accounts and take whatever you can. So Social Security, for example, there's a trust fund and you're not allowed to take from Social Security except to a certain amount. Right, So say social Security at any time has to have

two billion dollars. What that's a ridiculously low number. Let's say it's two billion, and then one day social Security has two billion, one million and its accounts. Federal government takes that extra hundred million because it's over and above the legal mandate and then uses it for whatever else. Well, it gets social Security from payroll, right from payroll taxes through you being employed. So it's another that's basically like a hidden tax, that's like a hidden way of generating revenue.

Increasing social Security tax isn't actually helping social Security, it's helping fund this the government. That's just like hemorrhaging money left and right. Yeah, it sounds like you know the old saying robbing Peter to pay Paul. That's exactly right. That's why al Gore was talking about in the two thousand election with the famous lock box thing, like put social Security in a lockbox, like if it has a surplus,

you can't touch it. And then that way, so social Security will be able to actually pay for the people it's supposed to in thirty years rather than being robbed to fund the federal government, which won't either raise taxes or cut spending or both. Yeah, I think most people. I don't know when it's gonna happen, but at some point someone's not going to get their Social Security that they paid into. Oh yeah, well, I think we're definitely

in that generation. Think. Yeah, I don't think it's going to keep going on much longer, or if we do, it'll be such a paltry amount that it'll just be laughable, not like other people getting rich office security. Now, well, I mean there's no and you certainly can't just live on it. And I mean you can't, I'm sure in certain parts of the country, but for most people it's a supplement to something. But I think it would just be like bucks or something for us who knows, I'm depressed,

don't don't be depressed. Why take action? Yeah, by you know, taking care of your own personal finances in spite of the government, I guess so. But I mean, yeah, yeah, it's weird, And this one is. I think it's great because everybody's involved, like all political factions are involved in this, and everybody has an opinion, you know, like of how

to do this best. But I feel like, aside from the people who are ready to push this into default, um, everybody has an understanding like this is a very fragile game of Jenga going on right now, and we could conceivably go on like this, but it would be better to fix it, but we need to do it surgically. Yeah, jinga, that's a good analogy, because the wooden tower feels like it's could topple at any moment. Yeah. Okay, so you got anything else? Uh nope? All right, Well that was

the debts you. If you want to learn more about it, you can type those words into the search part How Stuff Works dot Com. Since I said search far, which means it's time for listener mail. That's right. I'm gonna call this shout out to my gmo or as he calls her momo, his grandmother. Hey guys, I had I had your How Dying Works podcast my playlist for quite some time now, afraid to listen to your take on

what is happening in my life at the moment. I lost my father to a rare form of cancer at the beginning of the summer, and I'm currently caring for my grandmother who was in the closing days of her life. I'm an avid listener, and when the title appeared on my podcast list, I began to avoid the topic. I decided to finally listen to your take on the end of life today, and I have to let you know how much I appreciated your take on death and dying.

It's a topic that is never far from my mind these days, and I found the information you provided both informational and uplifting. Thanks for informing me that death is a process, not an event. I got a lot of information, as I always do from your show, but a surprising amount of comfort and reassurance. I also know you guys don't do shout outs a lot, but I took the challenge at the end of the show seriously. I would like to ask if you'd give a shout out to

my grandmother Mamo. It's a great grandmother name who was the person who originally instilled the curiosity and love of learning and me that led me to your podcast in the first place. Please let her know how grateful I am for all the things she's given me, and caring for her at the end of her life is the greatest gift I could ever ask for. That is from Chris Howell. So, Mamo, I hope you're still with us and listening. Thank you for raising an awesome grandson and

instilling that curiosity. And Chris, if Mama was no longer with us, then uh godspeed. I hope uh, I hope that end process was comforting nice somehow very nice. Yeah, thanks Chris, Thanks Mamo. That's some. That was a great one. Yeah, that was a good one. If you have something, some nice email that will knock our socks off like that, you can tweet to us at s y s K podcast. You can join us on Facebook dot com, slash stuff

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