Politicians are once again preparing to play the world’s dumbest game of chicken over the national debt ceiling.
Last week, Treasury Secretary Janet Yellen warned that the country is on track to hit the debt ceiling — the maximum amount of money that the federal government can borrow to meet funding needs.
The news has prompted warnings from economists about a potential fiscal crisis if Congress doesn’t take action soon. But it’s not clear whether congressional leaders will agree to raise the debt ceiling without strings attached.
In today’s episode, Dylan explains what the debt ceiling is and how it works, what will happen if Congress doesn’t raise it, and why it matters to the average American.
- [01:50] What the debt ceiling is
- [04:58] The debt ceiling through the years
- [07:15] How the debt ceiling works
- [11:49] What the debt ceiling fight boils down to
- [13:28] What will happen if Congress doesn’t raise the debt ceiling
- [18:22] The likely bargaining chips in the debt ceiling fight
- [21:25] The bottom line of the debt ceiling fight
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And today, ladies and gentlemen, it’s Friday, which means I’m gonna take one thing in the news and go a little bit deeper. And today’s topic is one that I truly did not believe would come up nearly as fast as it did. But if there’s a theme for the 2020s, it is the idea that things happen faster than expected. Today, ladies and gentlemen, this is dropping on the 20th, which means that if the current predictions are correct, we hit the debt ceiling yesterday on Thursday. And in the United States what that means for us is, well, ladies and gentlemen, we’re going to be under the cloud of potential US default, which would be catastrophic for us and everyone else in the globe. We’re gonna be seeing the next six months of political fuckery as people horse-trade trying to decide whether or not they’re going to take a completely nihilistic approach to the economy and how many people will be hurt in the process. As you can probably already tell, this is one of these things in American politics that literally drives me up the wall because I just do not care for it. It is a great example of how politicians use our daily lives. The average American suffers so that somebody else can put on a wonderful political show for their donors and threaten us and the global economy with catastrophe just so that they can push their political agenda. And so, today, ladies and gentlemen, my goal in this is to outline what is the debt ceiling? Where’d it come from? How does it work? What would default look like as we outline the world’s dumbest game of chicken?
[00:01:50] Alright. So, what is the debt ceiling? In the United States in 1917, the United States Congress passed as part of a Liberty Bonds bill, a limit to the amount of debt that could be issued by the United States government. Now, if you are in any way, shape, or form in tune with history, you know 1917 should click off World War I in your head. What was happening at the time is United States was engaged in supporting our European allies in their war efforts during World War I, so this is France and Great Britain, specifically. We were not at that time sending troops. We were instead supporting them financially and also with, you know, goods like tanks, ammunition, ships, etc. that we were then shipping across the Atlantic to help them out. The concern in the United States at the time was that the United States was becoming too involved in foreign affairs and that people in, not only in society, but also in Congress felt that this was not in line with American values.
[00:02:53] Now, if you’re listening to this in 2023, thinking, “What the hell you talking about? We meddle in foreign affairs all the time,” that’s because this is the point in history, ladies and gentlemen, where that all started to change. Because prior to this point, and if you go back to all the way back to George Washington’s farewell address, he specifically states that the success of the United States as an entity, as the American experiment, as the system of government of the people for the people by the people will only be able to survive if she does not get involved in foreign affairs, specifically those on the European continent. So, up until 1917, the United States was an isolationist country and that was the mood for the majority of people at the time. It’s worth noting the United States was not a big player in global affairs, despite FDR’s illusions to the contrary. And you might say, well, but there was a Spanish-American war that gave us the Philippines and Puerto Rico and Cuba for a short period of time. And you would be right. But all of that was done under the idea of the Monroe Doctrine, which stated that the United States would play in its hemisphere and Europe would play in their hemisphere and we wouldn’t meddle in each other’s affairs. So, what the United States was doing, at least in its own mind, was kicking Spain out of the hemisphere that the United States had claimed as its own sphere of influence. So, prior to this point, prior to the first debt ceiling in the United States, the United States did not meddle in foreign affairs as a general rule. Now, it’s worth noting that since then, the United States has not only become a significantly more global power to the point where we’re the only superpower on the planet as of the time of this recording, but the debt ceiling has gone right along with that. It’s been with us this whole time. And originally, it was supposed to be a check on our spending for military affairs. And if you look at the US discretionary budget, you know that nearly 55% of US spending in the discretionary budget, that would be the $1.7 trillion bill that was passed but last year, most of that’s military spending. Nothing’s really changed. We’ve just gotten bigger in scale.
[00:04:58] And since the debt ceiling was originally passed, it’s been raised 90 times since 1917 — 18 times for Reagan, eight for Bill Clinton, seven for George W. Bush, five for Obama, and three for President Trump. Although it’s worth noting that the majority of Trump’s presidency, the debt ceiling was suspended, which means that it wasn’t in effect. Now, you might think, well, hey, we’re getting better because we’re having fewer and fewer increases. That’s not actually true like at all. All that means is that the increases have been getting bigger and bigger and bigger as the debt ceiling has become a bigger and bigger political bargaining chip. I mean, even Mitch McConnell has said a number of times and is on record speaking out of both sides of his mouth when he says that the full faith and credit of the US government will not be questioned and that you don’t get rid of something like the debt ceiling because it’s a wonderful bargaining chip to extract concessions from the Democrats. So, there are no real innocents here, but there is one side that uses this far more than other. It’s worth noting that during this time since 1917, the debt ceiling has never been moved down despite the fact that the United States debt has decreased number of times over that same time period. In my lifetime, the largest percentage of increase in US debt was under Reagan with 186% in his eight years as president. That’s followed by George W. Bush in the early 2000s with 101%. And then, of course, Barack Obama is in third place as percentage of increase at 74%. And I wanna point out this one thing about using these percentages because the percentage of the total debt, so as the debt has gotten bigger, percentages mean larger dollar values, so it’s worth noting that that’s a flaw in the way that I’m reporting this but not as much as you would think. So, like Trump, for example, only increased the national debt by 33%. But it’s worth noting that in his four years as president, he increased it by $6.7 trillion, where Obama, who increased it by 74%, increased it by 8.6 trillion in his eight years as president. So, percentages are one thing, total aggregates are another. This is where this gets really complicated and it’s very hard to explain over a podcast when I can’t show you charts ’cause they actually really help here.
[00:07:15] So, let’s talk about how the debt ceiling actually works. And this is where we kind of have to go back to our US government courses in high school — if you had them — and think about like how does the US government actually work, like the legal structure of our government. So, we know that there are three branches of government. There’s the legislative branch — they pass laws and dictates, that type of thing — there’s the executive branch, who’s in charge of enforcing and enacting those laws; and there’s the judicial branch, who the US Constitution doesn’t necessarily say what the judicial branch is supposed to do, but one of the Supreme Court’s first ruling was to assign itself the role as the interpreter of those laws and the Constitution. So, that’s a whole different story that I’m not gonna touch right now but just know that because it might become relevant later. So, in terms of government spending, the House of Representatives has the power of the purse, so they’re the ones who can actually tax and spend and the Senate operates, at least in theory, as more of an advisory part to this. They have to sign off on it, okay? So, when Congress passes a bill that mandates spending, that’s within their scope of influence within the government. They are, of course, the legislative branch. That’s their role. But that means the executive branch, and in this particular case, this is the president and all of his cabinet secretaries, okay? That’s the executive branch, an the administrative state — for those of you who know what that is — that fits underneath the executive branch as well because they are enacting and enforcing the dictates of Congress. So, the executive branch is required by law to do what Congress told it to do. So, when the Congress mandates spending, it is an enforceable, valid, legal thing that the executive branch is bound by the law and Constitution to have to go do. So, what then happens is the executive branch orders the Department of the Treasury — currently headed up by Janet Yellen, former Fed chairman — and they will issue debt to obtain cash to be able to bridge the gap between tax collections and then when the spending has to occur. That’s at least the theory. That’s not how that works at all. But like, let’s just go with it. So, the reason the executive branch orders the treasury to do this is because it’s required by law to enact and enforce what Congress told it to do.
[00:09:38] So, now, here’s where the debt ceiling piece comes in. Because then Congress, wanting to make sure that Congress is hemmed in — which don’t waste too much time thinking about that — passes another law forbidding the executive branch from following the dictates they issued to the executive branch in the previous law. And both of these laws, the one telling them to spend and the one telling them they can’t spend are both equally valid and enforceable from a legal standpoint. If you think that that sets up a conflict, you would be right. Because this is where the judicial branch comes in because it’s an open question as to whether or not the debt ceiling is even constitutional or enforceable and the courts have never weighed in on it because it’s never actually been a big enough issue to have to rise to the Supreme Court. It’s worth noting that over the next six months, there’s a nonzero chance that we might actually get a ruling on this because this creates where Congress is basically saying, I legally order you to do this thing and it’s illegal if you do this thing, which would set up a conflict legally and constitutionally. So, I’m not a scholar; I’m an accountant. All I can say is that this system is just absolutely bonkers. But then again, what do you expect from the US Congress?
[00:10:51] Currently, the debt ceiling is used by Congressional Republicans as a bargaining chip and to generate headlines because remember the media has an agenda. That is to make money and nothing makes money like outrage and fear. And so, the debt ceiling is this massively scary thing, which puts the Republicans in the headlines so much more because they’re the ones who are in control of the House of Representatives, who have the power of the purse. And we do know that from the speaker of the house fight that now for the first time in a long time, any one member of the house can call for the removal of the speaker, which means the speaker’s gonna be a lot more trigger-shy in doing things like, you know, negotiating with Democrats to help get anything passed. Now, I wanna make me a hundred percent clear that I’m not really saying one way or the other whether or not I support this activity, whether I think it’s a good idea, or whether I think that the Republicans are right in this. Just pointing out the simple fact that they’re the ones who use this as a bargaining chip far more than Democrats do.
[00:11:49] But stop and think about this. Bargaining only works if you’re willing to default or at least the other side believes that you are. And so, what has happened in previous debt ceiling fights is Democrats have called Republicans’ bluff and said, “You’re not really serious because at the end of the day, you don’t want to actually damage the US economy as much as a default would.” The comeback term of course is, well, it wouldn’t damage the economy nearly that much or it will just be mild or something like that. And of course, as time has gone on and polarization has taken hold, we have much more calcified people on both ends of the spectrum that then force their parties into more and more extreme and untenable positions. The US debt ceiling fight in short is the world’s stupidest game of chicken because that’s what these people are doing. That’s what Congress is doing. They are playing a game of chicken where we are running towards in a car at a thousand miles an hour towards a brick wall going, gimme what I want or I will crash this car. And we as citizens should be fed up with this to the nth degree because there’s no way that we should allow Congress to play games with the debt ceiling, thus threatening us, threatening our children, threatening our parents, threatening the entire global economy just to be able to push their political opinions. If you truly believe in the free market of ideas, then make your pitch. And if people don’t buy it, maybe go reassess your sales pitch. I digress. I’m much more fed up with Congress as a general whole than I am of any particular political party because — and I could be here all day, but that’s not the point of my show. So, let’s just focus and move on.
[00:13:28] What happens if we don’t raise it? Well, essentially, there’s three options as far as I see. And the most obvious one is default. So, what happens in default? It would be an absolute utter disaster that likely leads to the entire fall of the global finance system. Since World War II and the Bretton Woods System, the United States has been the foundation for the global banking system. That’s just a fact. And so, the faith in the credit of the United States government is one of the foundational things to international global trade instability. If we default on our debt, that would be a catastrophe that would cause everything globally to grind to a screeching halt and will literally fuck over everybody. There is a contingency of people out there that say, well, we should force the government in default because that’s gonna really show the government. They gotta learn a lesson. Well, here’s the problem. In the American system — and this is true more or less in most of the Western world — we at least in theory have a government of the people for the people and by the people. Now, I could be here all day explaining why that might not actually be true. But the bottom line is that it is at least in theory and that’s how the system is foundationally set up, which means we’re the government. So, if we force the government in default, we force ourselves into default, which means we are screwing over ourselves to get back at ourselves. This is not a great thing. And a US default would be painful for everybody but be very welcomed by our enemies in China and Russia. And despite what you might have read elsewhere, Russia is not our friend and US default would bankrupt most of our allies. So, it would throw the entire global economy into a state of extreme flux. And there is an argument to be said that in that, something new and better might arise. I just know for myself, for my daughters, for my family, for my children, I don’t wanna live through that. That sounds awful. And there’s gonna be a lot of people who are hurt. And so, I’m not on the side where we think that default is a good thing in any way, shape, or form.
[00:15:39] Option number two is we find a way around it and there’s been tons of different ways that people have talked about this. Number one, Congress could just take this off the table by either eliminating the debt ceiling because it’s clearly not working. We’ve never actually gone down. It hasn’t stopped the growth of US debt. It just creates a lot of chaos and unpleasantness for everybody. And threatens the entire stability of our systems. Okay. So, they’re not gonna do that. They could raise the debt ceiling to a comically large number, which of course would be more or less the same thing, or we could also start thinking about this idea of the trillion-dollar coin. The Treasury Department could just straight up ignore Congress telling them not to spend the money that Congress ordered them to spend. They could find some legal way around it. This would result in legal chaos. So, even if we were able to avoid the default, it’s going to create a bunch of legal chaos because now we’ve called Congress’ bluff and Congress saying, yes, you must spend this money and that’s legally enforceable and no, you can’t spend this money and that’s legally enforceable. And now, we’re all gonna have to go through what is, for lack of a better term, a constitutional crisis. And more to the point, even if we did find a legal workaround, there’s no guarantee that the markets are gonna buy that. They might. I mean, hope springs eternal for sure, but there’s no guarantee that they would buy it. I wouldn’t buy it, and I don’t think the markets would either.
[00:16:57] Which brings us to number three: We order which payments should be paid and which services need to be shuttered. But again, this would create a legal crisis ’cause Congress ordered those services to go forward. Congress ordered the spending to have those services in existence. So, by not doing that, the executive branch would be doing something illegal. But by continuing to do that, the executive branch would be doing something illegal. And there’s a one point that’s been brought up in terms of how government spending works. That $1.7 trillion spending bill that made headlines a few months ago, that’s the US discretionary spending and that’s really what we’re looking at in terms of like those services because the services you think of like the National Park Service, food stamps, the Department of Interior, Department of Defense, Department of Energy, Department of Education — all those are under US discretionary spending and that’s about one fourth of total government spending. So, that $1.7 trillion package, that was for the discretionary piece that’s only one-fourth of it. And so, that’s where they’re saying like, oh, well that one-fourth of that spending, that’s what we’re gonna monkey with to try to get under this number. And that’s the part when we say there’s a government shutdown, that’s where the shutdown actually occurs. And if that’s news to you, that should tell you something about how the government, in terms of its financial house, is actually structured. But I’ll get back to that.
[00:18:22] So, in this fight that we’re all now gonna be subjected to for the next six months because we’re scheduled for default in June sometime, what are the likely bargaining chips? Well, in short, that’s Social Security, Medicaid, and Medicare. And when I told you that that $1.7 trillion spending bill was discretionary and was about one-fourth of total spending, these three programs are the rest of it, okay? The US government spending is anywhere from $4.6-5 trillion annually and the $1.7 is just a discretionary piece. Everything else is these other programs. Now, if you’re thinking, wow, that would be really politically unpopular, you’re right. And this is why these bargaining chips require crises to actually talk about seriously. It’s been noted that Congress, because of gerrymandering and several other things, has become terminally dysfunctional that more and more were relying on the courts to actually pass what we would otherwise have as legislation. The Roe v. Wade, regardless of which side you’re on, is a great example of this. Republicans knew that trying to argue to pass a national abortion ban was going to be politically, horribly unpopular. But if the courts ordered it, then they could avoid the entire political thing because none of them would be on record for either arguing for it or voting for it. And so, that was a big thing. And when they, and Democrats do this, too, especially with the ideas of gun control, right? So, we’re in a state of dysfunction where we’re relying on the courts to start to legislate from the bench. But when it comes to Social Security, Medicaid, and Medicare, that’s been so litigated that the courts aren’t gonna rule any differently than they’ve already ruled in the past, which requires Congress to actually make a change, which is what the courts have said. So, by creating a debt crisis, Republicans can now argue for entitlement changes to Social Security, Medicaid, and Medicare. Now, it’s worth noting that Social Security does not at least on a structural level contribute to the national debt now nor would it in the future. That’s a completely different story that I will get to at a later episode. Medicare is paid for by payroll taxes as well but it’s never enough. And so, the difference between what Medicare actually is required to spend, which is what Congress told them to do, and what is collected to actually be able to fund that, that difference always gets added to the debt. And Medicaid comes out of the slush fund for Congress, which doesn’t exist, so Medicaid is almost always just purely debt spending. These are the things that are most likely to be the political footballs while we argue about the debt ceiling. And they can use the idea of default as a political cover to actually talk about them. I mean, give the devil their due. It’s actually kind of an adroit way of arguing and trying to push something through Congress. Maybe not the most comfortable way, but it is, if this is where your standpoint lies, it’s getting the job done.
[00:21:25] So, ladies and gentlemen, the bottom line on the entire debt ceiling fight is this: number one, this is the most insane game of chicken that we could possibly have imagined that makes no sense whatsoever. And we as citizens should no longer tolerate our representatives continuing to play games with our financial lives. Number two, government finance is way more complicated than the headlines will lead you to believe. Ladies and gentlemen, I have worked in capital markets for a number of years. I am a CPA. I understand how these systems go together and government finance gives me a headache. If you would like to talk more about it, if you’re actually interested, go to Instagram, you can find me @fiscallysavage, and send me a message. I’d love to chat more about it but I’m not sure if it’s interesting to anybody that isn’t me. Because believe me when I say I can get down to the bottom of the rabbit hole on that, which would make for an entire series of Friday episodes. And number three, and this I think is the most important thing: the games the government plays really should hammer home the idea that no one is coming to save us. It’s worth it to understand that you need to dig the well before you’re thirsty. You need to build a base for yourselves in advance of the disaster. The entire point of taking control of our financial lives and living free is to understand the state of play so that we can prepare and we cannot be as affected by this type of game as we would be otherwise.
[00:22:55] So, ladies and gentlemen, I am hoping that you understand what you’re looking at in the headlines a lot better than you were before. And I also hope that this is inspiring you to start getting your financial house in order because what’s going to happen is really anybody’s guess. I don’t know any more than any other legal pundit might know. But I do know this: that you will be in a better place to weather whatever life can throw at you when you have your financial house in order and you have taken control of your life and are living free.
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