Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The US equity market, represented by the S&P 500 index, slipped 0.3% for the week ending May 12.
  • The most probable resolution to the current debt ceiling fiasco in Washington is a compromise between Congress and the President.

Markets shuddered as Congress warned that it would not approve the increase to the federal debt ceiling. The Treasury Secretary took to the media with tales of gloom should the federal government default and offered a direct, personal plea to senators and representatives to raise the debt ceiling.

The year was 2017. Treasury Secretary Steve Mnuchin, part of the Trump administration, was repeatedly in the news imploring Congress to raise the debt ceiling. “Honoring the full faith and credit of the United States government is one of the most important issues and as Treasury secretary I will do everything in my power to make sure that we honor the full faith and credit,” Mr. Mnuchin repeated incessantly to any reporter who would listen.

Of course, the debt ceiling was raised in 2017 and the US government did not default on a single penny of its debt. The same outcome has occurred every year since.

The debt ceiling is a vestige of a long-ago era in government borrowing and spending mechanics. Prior to World War I, Congress had to authorize every bond issuance by the federal government for any project it wanted to take on. One example of this was the 1902 Panama Canal Act, when Congress authorized Treasury to issue bonds for the construction of the canal. Treasury had to keep its funds for government projects separate from one another.

The government’s borrowing needs exploded once World War I began. Congressional approval of every bond issue became too onerous. So, Congress decided to give the Treasury the authority to borrow up to a certain limit without tying those dollars to any specific project.

The creation of the debt limit was intended to make it easier for the federal government to borrow. The idea was to give the Treasury more flexibility.

The debt ceiling was raised with little fanfare for about 100 years since that time. Over the last 12 years or so, the debt ceiling has morphed into a political weapon for Congressional Democrats and Republicans who wish to exert any sliver of power available.

It is not worth rehashing the dire outcomes should our politicians decide that it would be in our national interest for the government to default on its debt. One only needs to turn on a television and tune into a news channel for that.

The most likely outcome is that there will be a compromise between Congress and the President, and the debt ceiling will be lifted.

However, should no agreement be reached, there are numerous possible contingency plans. Presumably, the Biden administration has done some work on this. It could prioritize payments on its debt over other payments, for example. Biden could sign an executive order that Federal Reserve-held treasuries are now part of intergovernmental holdings and thus not counted against the debt limit. That would lop off $5 trillion in debt. Or, the Secretary of the Treasury could authorize the US Mint to strike a trillion-dollar platinum coin and deposit it in the Treasury General Account at the Federal Reserve to pay off its debt. The coin sounds gimmicky and would infuriate Congress, but it appears to be perfectly legal and sure would beat defaulting on the debt.

Constitutionally, Congress has the power of the purse. It controls federal spending and taxation. The amount of debt issued by the Treasury is determined by the federal budget deficit, the amount of spending over taxes… which is determined by Congress. As Mr. Mnuchin stated very clearly back in 2017, the time to shrink the deficit is during the federal budget process.


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