The level and growth of a nation’s private debt, more than public debt, predicts the worst recessions.
The Bipartisan Budget Act of 2015 suspended the debt ceiling through mid-March of this year. On March 16, the debt ceiling was raised to the current level. When the debt ceiling is reached, the Treasury will not be able to issue more debt to borrow new funds from the public. Instead, the Treasury must take extraordinary measures to raise cash. Extraordinary measures are policies that temporarily lower the national debt by reducing the Treasury securities held by government agencies—known as intragovernmental debt.
Ongoing federal budget deficits have required the U.S. Treasury to issue substantial amounts of debt to finance government spending. The Treasury has been able to easily issue debt since the federal government enjoys the highest credit rating, which lowers the interest rate that creditors demand. Historically low interest rates in general have further helped limit interest expense.
Facing the Facts
How the federal government collects and spends money has changed substantially over the years. Policy decisions made many years ago influence federal outlays today in important ways. Because of changes in the structure of the budget, the annual appropriations process is constrained, and therefore, is a less powerful tool for addressing fiscal challenges than it used to be.