US debt ceiling and why it is important.

In 1917, the US Government passed a law that set a limit on the total amount of debt that the government can incur – initially set at $11.5bn. However Government debt has increased under every President and now stands at $31.4trn. In January this year debt hit this latest level which means that the Government cannot legally borrow anymore money. In order to increase the debt ceiling it must be voted through the House of Representatives which the Republicans have a majority. Although the ruling party is the Democrats, the Republican majority can pressure President Joe Biden to agree on cuts to the budget. In the past, under the same scenario, there have been hastily arranged agreements at the 11th hour to avoid a default. Below is a good video from the WSJ explaining the debt ceiling and the consequences of it not being raised.

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US Debt as a % of GDP – who is responsible?

A hat tip to colleague David Parr for this great graphic. It shows which administrations have been America’s biggest borrowers from 1940-2012. What is interesting to note is the level of borrowing during recessions – grey columns. During the 1970’s there was very little borrowing as the policy of the day was to reduce the inflationary pressure and cut the money supply. Compare that with 2002 onwards and you will see an increase in debt to get out of the recessionary periods. Click the link below to go to the enlarged image.

US Debt as a % of GDP