Kavan Choksi Professional Investor Offers Valuable Insight Iinto the U.S Debt Ceiling

The debt limit or the debt ceiling is the cap on the total amount of money that the United States is authorized to borrow for the purpose of funding the government and meeting its financial obligations. As Kavan Choksi Professional Investor says, as the federal government runs budget deficits, it has to borrow large amounts of funds in order to pay off its bills. Budget deficits mean that the government essentially spends more money than it actually brings in through taxes and other revenue sources.

Kavan Choksi Professional Investor provides a brief overview on the U.S debt ceiling

Approaching the debt ceiling frequently prompts legislators to advocate for reducing government expenditures. However, it is essential to note that raising the debt limit does not approve additional spending. Instead, it enables the United States to allocate funds for programs that Congress has already authorized, like paying salaries for members of the armed forces and funding social safety net programs

As the United States comes close to reaching its debt ceiling, its Treasury Department ideally makes use of certain accounting manoeuvres known as extraordinary measures in order to continue paying the government’s obligations and avoid a default. Such measures temporarily curb certain government investments so that its bills can continue to be paid.

The United States Constitution states that the Congress must authorize government borrowing. The debt ceiling or limit was instituted in the early 20th century so that the Treasury would not need to ask Congress for permission every time it had to issue debt to pay bills.  The Congress passed the Second Liberty Bond Act of 1917 during World War I to provide the Treasury with more flexibility in terms of managing federal finances and issuing debt. The debt limit slowly started to take its current shape in 1939 as the Congress consolidated diverse limits that had been set on different types of bonds into a single borrowing cap.

In case the U.S. government exhausts its extraordinary measures and runs out of funds, it will not be able to issue new debt. This basically means that it will not have enough money to pay its bills, which include interest and other payments it owes to bondholders, military salaries and benefits to retirees. While no one knows for sure what exactly would happen if the United States gets to that point, economists and Wall Street analysts do warn that such a situation would be economically devastating. In fact, it might plunge the entire world into a financial crisis.

As per Kavan Choksi Professional Investor, over time, multiple ideas have been raised and discussed to make sure that critical payments, especially payments to the investors who hold U.S. debt, are not missed. But these ideas have never been actually tried. Hence, it remains unclear whether or not the government can continue paying any of its bills if it is unable to borrow more money. One proposal underlines that the Treasury should to prioritize certain payments to avoid defaulting on U.S. debt. In such a situation, the Treasury would first pay the bondholders who own U.S. Treasury debt; even if it delays other financial obligations like government salaries or retirement benefits.