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The U.S. Debt Ceiling Expired On March 1 And Nobody Cared — But They Will

The federal debt limit expired on March 1. Why does it matter? Markets didn’t move and the holders of the $22 trillion in national debt didn’t utter a peep of worry that the U.S. government wouldn’t pay its interest or redeem its bonds. The government is now taking temporary measures to pay its bills—delaying intragovernmental transfers and probably looking for coins in the couch cushions. The U.S. loses its legal authority to pay out cash in fall 2019.

Not many nations can announce they legally can’t pay all of their debts and yet avoid a wiggle in the credit risk of their bonds. Imagine a nation, say Argentina or Italy, signals the government can’t legally pay debt; their interest rates would soar. When the limit is reached, the U.S. Treasury can’t borrow any more, which one would think would cause a crisis of confidence, severely impacting the real economy for fear the government would default on our debt. But the risk premium on U.S. Treasuries did not budge much.

That Americans own most of the debt helps calm markets, but interest rate increases can trigger recessions.  

The Federal government, Social Security, Medicare, Military and the Federal Retirement system own 27% of the debt. Social Security, Medicare, the Military and the Federal Retirement System, all government agencies, hold a surplus and invest in U.S. government bonds. Foreign governments and investors hold 30 percent of it. Individuals, banks and investors hold 15 percent. The Federal Reserve holds 12 percent. Mutual funds hold 9 percent. State and local governments own 5 percent. The rest is held by workers through pension funds, insurance companies, and savings bonds.

Unlike virtually all other countries, the U.S. needs congressional approval to raise the debt limit, a self-imposed brake on spending imposed in 1917 during the rapid spending under World War 1. The mechanics of lifting it will become, again, a pitched political battle between President Trump and a passive Republican Senate versus House Democrats in the fall….[  ]

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