2023 US Debt Ceiling: Are We Headed for Financial Disaster this Year?

The United States debt ceiling is a limit set by the U.S. Congress on the total amount of debt that the Federal Government can accumulate. On January 19 2023, the debt ceiling hit its limit, and many people are wondering what will happen next. In this video, we're going to look at what the debt ceiling is, how it's reached, and what could happen if it's not raised. We're also going to discuss some of the possible consequences for hitting the debt ceiling for both individuals and our country.

So should you be worried about the U.S. debt ceiling? Well, watch this video and you'll find out. And we're going to share the answer to our trivia question, which is: what U.S. president paid off all of our debt?

Phil Clark, welcome to We're Talking Money. I want to share some facts and figures about the United States debt ceiling. A lot of people are talking about it right now because it's been hit, but a lot of people don't really know what it is. I'm going to break it down for you in easy terms so you can understand what's happening. After that, I'll let you know if you should be worried or not.

The United States debt ceiling is a major factor in the overall health of our economy. Unfortunately, many people overlook this important detail. It's due to a lack of understanding. The debt ceiling sets the maximum amount that the federal government can borrow and thus dictates how much money it has on hand for everything from welfare programs to military spending. This means that if we don't pay attention to the debt ceiling, we could end up with a government that's unable to provide essential services and support.

Not only can neglecting the debt ceiling lead to instability in our economy and government, but it can also open us up to risk from other countries. If the U.S. government has too much outstanding debt, creditors may be less willing to lend us money, or they might require higher interest rates. This increases the cost of borrowing, and it can put a huge strain on taxpayers as well as businesses and investors.

Since 1960, the debt ceiling in the United States has been raised 78 times, yet you rarely hear people talking about it. That's because it's a complex topic that many people, well, they simply don't understand it. So should you be worried? Each time the debt ceiling is reached, the United States, it's at risk.

What are the consequences of hitting the debt ceiling? Well, it could mean that the government shuts down, plain and simple, which would be devastating for our economy and citizens alike. Why? Well, consumer spending, it makes up almost 70 percent of our nation's gross domestic product, or GDP, and a shutdown would have far-reaching effects. More specifically, you could see things like furloughing of non-essential government workers, delaying tax refunds, delaying Social Security, shutting down government-funded businesses, and the list continues. In addition, credit markets could suffer, leading to higher interest rates, and that could weaken the dollar, which means more inflation at a time when the Fed is trying desperately to bring down inflation.

So if this is such a big deal, why do we keep hitting the debt ceiling? Well, let's look at the financials for the United States in 2022, and I think you'll get the point. The United States reached its 31.4 trillion dollar debt ceiling on January 19th this year.

Now, Janet Yellen, in her letter dated the 19th day of January, she described the actions that can be taken. It would be things like redeeming existing and suspending new investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, suspending reinvestment of the Government Securities Investment Fund, or what they call the G Fund, could be suspending reinvestment of the Exchange Stabilization Fund, or the ESF fund, and suspending sales of State and Local Government Series Treasury securities. None have happened, but these are things that could. These measures are going to continue to be evaluated over the course of the next six months, which is basically how long our Congress has with our president to make a decision about this debt ceiling.

In 2022, the United States took in roughly 4.9 trillion dollars. That's a huge amount of money, 4.9 trillion, mostly from income tax. But here's the problem: the United States spent 6.3 trillion dollars. Folks, that is a 1.4 trillion dollar deficit in only 12 months. Can you imagine if you ran your household like this? Your banker would laugh you out of the bank.

When you think about it, 31.4 trillion, it's really hard to imagine. But think of it this way: if one small black box represents one billion dollars, our national debt represents 31 455 of those little black boxes.

Back to the income and the expenses. Where did the 6.3 trillion dollars go? Well, most went to Social Security programs, or what we'll call social programs and services, things like Medicare, Social Security. Those take up a huge amount of the annual budget. We need to make sure that our most vulnerable are protected. People that have paid into that system, they deserve to be paid. But we also need to take a responsible and fiscal action so that debt does not spiral out of control, if it hasn't already done so.

So far in 2023, that has not been the case. In fact, according to treasury.gov, spending in the New Year, it's already 421 billion dollars more than our country has collected. Look, clearly our country has a spending problem, like it or not. Anyone that doesn't see this must not understand simple math. Keep in mind, a huge part of the problem, it's not necessarily new things being created as an expense; it's promises made many years ago that are still being funded. At the same time, new promises are being made by politicians.

Even so, why not just raise the debt ceiling for the 79th time? Well, I'm glad we've asked the question. The answer is pretty simple: we can't keep kicking the debt can down the road without addressing our out-of-control spending, or, as President Biden pretends, we must increase taxes. It might take a little of both. Regardless, we need to pass a budget that reduces wasteful spending and stop making unsustainable promises, and then make sure that all of this gets implemented. Until this happens, any increase in the debt ceiling will just be a temporary Band-Aid on an underlying problem that requires more than just a short-term fix.

Let's consider why this is the case. We raising the debt ceiling and printing more money means a weaker dollar. That means more inflation. More inflation means higher interest rates; we see that happening right now. Higher interest rates means a slower economy; we're already dealing with a slower economy. Are you getting the picture now? It's actually pretty simple.

But making things more complicated is energy prices. In the last few months, energy prices declined. That helped inflation in a huge way. Everyone felt that towards the end of 2022, and it was a good feeling. We saw gas at the pump going down. That temporarily reduced inflation, and we saw that in the latest inflation numbers. But I don't expect a continuation of falling prices.

Why? The International Energy Agency is saying global oil demand will intensify by 1.9 million barrels a day in 2023. A huge driver of this increase is none other than China. Now, their economic stagnation in 2022 led to lower demand. Experts say that China's consumption will increase by 510 000 barrels per day. I think this will lead to upward pressure on oil prices. That is working against the Fed's mission to bring down inflation.

This means interest rates, they may need to exceed the Fed's original plan and stay there for longer. That means more pain for an additional period that we really have no idea how long that may be. More rate hikes means more volatility for the stock market and likely eliminating any chance of avoiding a recession in 2023. In fact, I think it will be a miracle if the Federal Reserve pulls off what they call a soft landing.

So here's the bottom line: we need to pass a budget that reduces wasteful spending and stops making these unsustainable promises. Until this happens, it will be just another temporary Band-Aid on an underlying problem that requires more than just a short-term fix. In the immediate term, you can forget a soft landing, I hate to say it. Longer term, defaulting on our obligations, that becomes more realistic. Ultimately, our currency could become something of the past with no value. In other words, we could become a bankrupt country. Let's hope it doesn't go this far.

I suggest you have a look at your short and long-term financial plan. Be sure you are allocated properly among investments, with plenty of savings to get you through the potential rainy day scenarios described in our video as markets remain volatile. Don't view this as a time for fear. Instead, it's times like these that so very often present great opportunity.

Now, what about that trivia question? Here's the answer. Which U.S. president paid off the national debt? You've got to go all the way back to 1835. Andrew Jackson paid off all the national interest-bearing debt, and he is the only president to have done this. Perhaps it's time for someone who appreciates no debt to take the helm.

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