Debt Ceiling and AI Trends

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Today, we will learn more about:

1. What is the Debt Ceiling?

2. AI Trends

What is the Debt Ceiling?

On January 19, 2023, the U.S. hit its debt ceiling of $31.4 trillion (which accounts for around 123.4 % of the country's Nominal GDP), this has sparked conversation surrounding the potential long-term damages if the U.S. debt ceiling is not raised. To begin, the U.S. Debt Ceiling is the maximum amount of money the U.S. can borrow by issuing bonds. The government authorizes this debt to be able to meet military salaries, interest on the national debt, tax refunds, Social Security and Medicare benefits, as well as other payments. If the national debt level reaches the ceiling, then the Treasury Department must “resort to other extraordinary measures to pay government obligations and expenditures until the ceiling is raised again.” The debt ceiling continues to be raised to avoid default, and there have been numerous government shutdowns due to conflict between the White House and Congress. Jerome Powell worries that the U.S. will default on its debts as early as July, however, the debt ceiling has been suspended or raised several times in the past to avoid the risk of default.

Released February 27th, this episode of Clauses & Controversies explores the history of the US Debt Ceiling and aims to answer three questions, “Do markets care about the debt ceiling?” “Is there any real risk of non-payment” and “Aren’t there a dozen obvious ways to borrow despite the debt ceiling?” Moreover, the episode also discusses potential financial engineering tricks to alleviate or avoid the debt ceiling.

To begin, there are only two sovereign nations that have a debt ceiling: the United States, and Denmark. The debt ceiling was originally put in place during WWI, and the reason it occurred was so that Congress did not need to continue authorizing each new round of borrowing. Spending requirements were so great for the war that instead of having back and forth between the Treasury, Government, and War Campaign, Congress just decided to establish a maximum ceiling they could borrow to, and let them take as they deem fit. Now, the debt ceiling is a huge political problem and topic of debate. It has been used more as a politically contentious weapon, as we saw during the 2011 debt ceiling showdown, as well as being the catalyst for various government shutdowns.

The podcast discusses credit commitment theory and how the current behavior of the US should be leading to less confidence in the bond markets. Posing the question that if the debt ceiling constraint was put in place to foster trust amongst the government and creditors, then why has the fact that they rose it numerous times as they neared the ceiling not shattered the confidence of the bond market? Another topic discussed includes the use of the theoretical “Trillion-Dollar Coin” to pay down America’s debt.

Credit Commitment Theory

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