SUBHEAD: The U.S. debt ceiling is set to explode beginning this month under Trump’s planned tax cuts and spending.
By Benjamin A. Smith on 7 Mrch 2017 for Lombardi Letter -
Image above: Political cartoon by Jim Darcy on 12 April 2011 labeled "Yes, we are open... until the debt ceiling collapses". From (http://www.cleveland.com/darcy/index.ssf/2011/04/us_debt_ceiling_editorial_cart.html).
Like the smell of Washington’s cherished Magnolia trees blooming in April, the waft of deficit spending is in the air.
The U.S. debt ceiling is poised to explode under Trump’s planned slash & burn tax cut policy, bringing with it significant budget uncertainty. How much is the U.S. debt ceiling in 2017 anyway? That’s a moving target depending on how fast Republicans can legislate tax changes through Congress.
As it stands currently, the U.S. debt ceiling is suspended until March 15, 2017 under an agreement struck by President Obama and Congress in late 2015. The last official debt ceiling limit was $18.113 trillion.
On March 16, however, the debt limit will reset to account for all debt issued while it was suspended. This could trigger something called “extraordinary measures” provisions, which are accounting maneuvers the government can use to temporarily keep the debt under the “limit.”
This maneuver would essentially legally prevent the United States from technically defaulting on its debt (Source: “Bipartisan Budget Act of 2015,” U.S. Government Publishing Office, last accessed March 3, 2017.)
Exactly how long these extraordinary measures will last is uncertain. It isn’t spelled out explicitly in the Budget Act, so it could be a few weeks or a few months, though many budget experts say it could last into August or September. It will be up to new Treasury Secretary Steve Mnuchin to avert a potential U.S. debt ceiling crisis before it begins.
Indeed, Steve Mnuchin has already stated his preference to avoid Congressional drama and raise the debt ceiling promptly. There’s no doubt the Treasury Secretary recognizes the importance of the situation. “Honoring the U.S. debt is the most important thing…I would like us to raise the debt ceiling sooner rather than later.” (Source: “New Secretary’s first job: Avoid a crisis,” CNN Money, February 13, 2017.)
Eventually, the current U.S. debt ceiling will be raised again beyond its reset level (likely north of $20.0 trillion). Politicians from both sides of the isle will look to extract concessions for votes, and a new limit will be born. But what will the U.S. debt ceiling 2017 look like once the ink is dry? This depends on several factors.
As the U.S debt ceiling is simply legislation limiting the amount of debt that can be issued by the U.S. Treasury, Congress (with the President as signatory) ultimately decides what the limit will be. Since the incumbent Republicans currently hold majorities in both the House of Representatives and the Senate, there’s reason to believe the President will attempt to push the limits of the debt ceiling.
How Much Is the U.S. Debt Ceiling in 2017?It’s important to look at context when attempting to ascertain how high the limit can be raised. After all, Trump has used debt financing his entire life to build his empire. As a former real estate mogul, the vast majority of properties couldn’t have been developed without it.
Trump has even self-proclaimed himself as “King of Debt.” There’s little reason to believe this mentality has changed significantly since his business years.
In fact, Trump has said as much. On the campaign trail, despite soaring debt levels, Trump stated that America should borrow more while rates are low. “What’s going to happen when the rates eventually will go up and you can’t borrow, you absolutely can’t borrow because it’s too expensive?
It would destroy our balance sheet, totally destroy the balance sheet. So you’d be paying so little interest right now. This is the time to borrow.” (Source: “Trump: This Is The Time to Borrow,” The American Spectator, August 11, 2016.)
And as readers might expect, planned proceeds of a larger U.S. deficit should filter into capital expenditures (CAPEX) projects throughout the country.
Construction development was Trump’s calling card as a civilian, and he’s indicated the desire to modernize the nation’s infrastructure once in the Oval Office.
Just a few hours after his election victory, Trump said “We’re going to rebuild our infrastructure, which will become, by the way, second to none.” (Source: “What You Need To Know About Donald Trump’s $1 Trillion Infrastructure Plan,” Fortune, December 21, 2016.)
While it’s clear that planned infrastructure spending will require the Federal government to borrow more if passed, it isn’t the only thing. Proposed tax cuts could cause upwards pressure on the U.S. debt ceiling as well.
According to The Tax Foundation’s “Taxes and Growth” model forecasts, Trump’s income and corporate tax reductions would cut federal revenue by between $4.4 trillion and $5.9 trillion on a static basis.
Even when the stimulatory effects to the larger economy are accounted for, the Tax Foundation still forecasts that revenues would decrease on aggregate between $2.6 trillion and $3.9 trillion (Source: “Details and Analysis of Donald Trump’s Tax Plan,” Tax Foundation, September 19, 2016.)
If proven true, the U.S. debt ceiling will need to be raised even higher to avoid the ballooning budgets deficits sure to follow.
As we can ascertain from the debt ceiling by year table below, the debt is rising fast enough on its own. Slashing revenue collection, while simultaneously increasing CAPEX spending is not a recipe for narrowing deficits going forward (as needed as it may be).
Components of Debt Subject to Limit, Full Year 1996-2015
|Fiscal Year||Debt Limit||$ Billion (U.S Debt, Actual)|
Source: The Debt Limit: History and Recent Increases, Congressional Research Service, November 2, 2015
Recognizing the writing on the wall, the administration is already thinking of innovative ways to extend debt maturity beyond what is currently available.
Treasury Secretary Mnuchin caused a stir in the 5-30 Treasury yield curve by suggesting maturities on future Treasury issuance could be extended to as long as 50 or 100 years. Mnuchin stated,
“We’ll look at potentially extending the maturity of the debt, because eventually we are going to have higher interest rates, and that’s something that this country is going to need to deal with.”(Source: “Steven Mnuchin Roils Bond Markets With Suggestion Of 100 Year Treasury Bond,” Zero Hedge, November 30, 2016.)
The United States Treasury’s longest dated issuance currently stands at 30 years, with 5.7 years being the average weighted maturity of outstanding U.S. debt.
What Does Raising the Debt Ceiling Mean for Average Americans?
Since the Federal Government breaks the debt ceiling on a regular basis, a higher ceiling effectively equals higher spending. Higher spending will lead to higher deficits if offsetting revenue is not achieved. Since taxation is expected to lag behind Federal outlays, the end result will be expanding deficits as long as the Trump administration is governing.
This will have consequences regarding consumer financing over time.
As indicated, there may be a plan in place to extend maturities beyond 30 year Treasuries to lock in low rates longer-term. But what if they’re unsuccessful in doing so?
Regardless, when the Federal Reserve purchases Treasuries, they usually unwind their portfolio to drain credit out of the system. If they fail to take action to unwind, they effectively increase the monetary base and erode the value of the dollar by creating excess dollars.
But it’s a tricky maneuver to unwind a portfolio when the Federal Reserve has been the biggest buyer in the market. So once they unwind, there a risk yield curve interest rates increase meaningfully, raising the costs of consumer finance.
Mortgages, credit cards, and car loans are among the most common consumer purchases on credit. This poses significant challenges to people who’ve become accustomed to easy credit and planned for lower payments.
Adding additional layers of debt will make the Federal Reserve’s job that much tougher down the line. It’s basically a can-kicking exercise for a later term, but eventually the consequences .come due.
But it’s not all bad news. Much of financing stemming from a large U.S. debt ceiling increase will flow into infrastructure spending, which is badly needed. According to the American Society of Civil Engineers (ASCE), the foremost experts in the field, this is certainly the case.
Their 2013 report card determined that America has a significant backlog of overdue maintenance across several area of infrastructure, and that modernization is desperately required.
Their worst grades were awarded to levees (D-) and inland waterways (D-), and they give the state of American infrastructure an overall grade of D, which is a barely passable assessment. (Source: “Save America’s Infrastructure, American Society of Civil Engineers,” last accessed March 3, 2017.).
And the neglect of America’s crumbling infrastructure is starting to have real word safety consequences for large segments of the population.
Recently, 180,000 residents had to be evacuated due to when heavy rains caused a 250-foot section of the Oroville dam spillway to collapse. The crisis has exposed the vulnerability of many public works projects due to age.
It’s estimated that by 2020, the number of dams in the U.S. living past their designed lifespan will reach 65%. The Oroville dam will be among them; it was built 49 years ago this year. (Source: “What the Oroville Dam Disaster Says About America’s Aging Infrastructure,” Fortune, February 18, 2017.)
So, what is the debt ceiling now? We should find out in the second half of 2017 what the new figure will be. Most would agree that debt is much too high right now, but politically, there’s little chance of a slowdown any time soon. Not with Trump’s extensive history of private deficit financing, or America’s need to modernize infrastructure.
Only a significant pushback from Congress, with deficit hawks like Rand Paul breaking ranks, can seemingly slow this trend down.