The Treasury Update Podcast by Strategic Treasurer

Episode 256

Understanding Your Connection to the Federal Debt Limit

Join Jason Campbell and Paul Galloway on the Treasury Update Podcast as they discuss the Federal debt limit and the Federal Reserve’s decisions. This conversation explores how the debt limit is impacted by politics and funding sources. What are the pros and cons of raising the debt ceiling? What is the Fed’s current position? Is there a potential interest rate drop coming? What are the likelihood and potential severity of an impending recession?

Host:

Jason Campbell, Strategic Treasurer

Jason Campbell

Speaker:

Paul Galloway, Strategic Treasurer

Paul Galloway - Strategic Treasurer
Episode Transcription - Episode #256 - Understanding Your Connection to the Federal Debt Limit transcript

Announcer  00:04

Welcome to the Treasury Update Podcast presented by Strategic Treasure, your source for interesting treasury news, analysis, and insights in your car, at the gym, or wherever you decide to tune in.

 

Jason Campbell  00:18

Welcome to another episode of the Treasury Update Podcast. I’ll be your host, Jason Campbell, business development leader here at Strategic Treasurer. And joining me today for this great discussion is our senior director Paul Galloway. Paul, welcome to the show.

 

Paul Galloway  00:31

Hey, thanks, Jason, looking forward to the conversation.

 

Jason Campbell  00:36

I’m always looking forward to anytime I get an opportunity to talk with you, Paul, just like always, you know, it’s always a pleasure, your wealth of knowledge is just, it’s a blessing to be a part and associated with you in these podcasts. And hopefully, for our listeners will feel the same as you continue to educate our wide audience here. So looking forward to this discussion, and, and really what this piece of what we’re going to do today, I think it’s extremely relevant. You know, obviously, it’s something that is top of mind for, for a lot of folks, especially as those who really monitor government actions right now, and what’s happening in that in that financial world, and more importantly, really talking about the federal debt limit. I know, there’s, you know, I’ve been watching keeping track of it, I’m sure you have as well. And, and I’m sure many of our listeners have about, you know, it’s always I want to say it’s a fight, but it’s always a it’s a give and take, right. It’s one of those words, a lot of negotiations go into this, to ensure that we don’t move into a default situation. And I think our listeners are really gonna enjoy today’s conversation about this topic here. So let’s kick, let’s kick it off and get right into the meat of things. And let’s talk about this federal debt limit. And, Paul, just want to give us some context and background for listeners, and you just kind of give us your your thoughts around the debt limit?

 

Paul Galloway  01:54

Yeah, sure. Jason, you know, I think a lot of people are, are thinking about this. And if they aren’t, they shouldn’t be. It’s certainly something that has been a problem in the past, it’s not the first time we’ve had this pressure between two sides of political parties, not agreeing on what a fiscally responsible debt limit is, and what what they should be doing so. So you’ve got people on both sides of the aisle that have different ideas and thoughts on what a debt limit means, and how they should spend money. The way that our federal government is able to effectuate all the activity that occurs in the US supporting programs, funding the government. That means all of our lawmakers, the people, we elect, an office judges, or military, infrastructure, all these things that we do to help support our economy, from a governmental standpoint, come into play. And so politics have a direct impact on a you know, what gets passed. And so we have President Biden and how speaker McCarthy are meeting, they’ve had several meetings, I’ve had on off conversations, either in person or otherwise, or with representatives on both sides to talk about the issues. And what it comes down to is, is people are elected into office to represent their states or the country as a whole. And they have certain political things that they have committed to. And so anytime you get into these kinds of conversations, they’re trying to protect their constituents, desires, what what it is that the majority wants out of their government. And so politics play into this big time. Now, question is is, you know, who funds us? J sound? Oh, have you thought about that? You know, do you have any ideas on? How does the federal government raise capital or raised money to spend and how do they do their? What are their options? Yeah. For many people, they may realize, well, well, we have an arm of the government, the Treasury that can print money. We have the Federal Reserve that controls monetary policy within the US. That can have an impact on money supply. But at the same time, there’s also receipts that the government receives in the form of of taxes on top of that, so there there are revenue streams that the government receives as well. So it’s not all just spin based on the federal debt limit. But the but the reality is, is that there’s only so much that can go around and you’re trying to fund all these different programs, and keep your government going at the pace that the American people expect it. So there’s there can be differences in opinion or thought of how that should work. And I’ll just just pause and give you a second to kind of think about that, and see if you have any additional questions in regards to, you know, federal debt limit, because once we hit that limit, that means that, essentially, it means that the government has run out of access to cash via debt funding. Now, we have obligations because we have a significant amount of debt, the federal government has an amount of $31.4 trillion in debt today, once we reach that limit, they will have expended all the amount of debt funding they can do. And they’ll have to rely solely on the revenues that they have to fund all their obligations. You can imagine on an amount of $31.4 trillion, there’s quite a few interest payments, as well as principal payments along the way, for issuances that mature. So there’s a lot cash evolved in that amount of debt.

 

Jason Campbell  06:45

We grew up and we remember always watching, you know, that the ticker of national debts and always seen, especially when it’s always like, you know, how you say, an election year, so to speak. Right. And it’s, it’s intriguing, and understanding how it affects so many pieces of how our country operates and functions, as you mentioned, the military, you know, federal federal agencies, you know, even like, it affects, you know, government workers, period. So whether it’s national parks, you know, even from securing our borders, you know, there’s so many different pieces. Now, when you’re mentioned kind of the politicians a little bit, I’m like, oh, maybe sometimes I may not be a bad idea to reset them a little bit, but near there. But I guess, I guess the other thing to think about as well, as you know, the things that shut down because of these things, and it’s almost like, again, we’re watching and we witnessed this, it seems like it happens every year, right? Like, we get to the budgeting and we get to the debt limits and the ceilings, it’s not like it, we it’s magically just all of a sudden appears out of nowhere. We know that we’re heading down this this pathway, it’s like, it’s like witnessing a train collision, you know what’s about to happen, right? And it’s about having where, you know, it’s like, it shouldn’t be a fight, there should be a point where you like you said, you know, doing what the, you know, the vast majority, you know, doing this right, but the constituents and things of that nature. And as I know that as far as how it impacts our individual local lives. But I like to take it a little step further, if you don’t mind and ask the question of from a corporate treasury or just from a, you know, a corporate, I guess, impact of this debt limit? Can you just kind of give me just kind of your thoughts on what impacts this, this can relate to corporations like how does it How does it impact those, you know, outside of just your your normal civilian day to day life?

 

Paul Galloway  08:35

So when you think about the impacts of this to corporate treasurers today are people that manage cash or company’s capital, I can think of corporations and government entities in the same way. When it comes to the subject we’re talking about today. Government has a mandated limit in terms of what they can borrow US government also has a credit rating, US government also receives revenues. All this goes to fund everything that the federal government does. We think about corporations, corporations can issue debt. Now, there are different types of corporations, and we’ve talked about this before different types of capital races that they can do. But let’s just let’s just take larger US corporations that have credit ratings by recognized rating agencies out there. So your rating can have an impact on how much you have to pay for the debt that you borrow. It can also impact the amount that you may raise based on what the mixer your balance sheet looks like. So, like the federal government corporations have a certain amount or threshold of capital the be able to raise the debt or and equity offering but we’re focused on debt here in this conversation. So there’s only so much you can raise, your equity holders aren’t gonna allow you to raise more than a certain amount, the markets aren’t going to have an appetite to give you more than a certain amount. So there are limitations to the amount of capital that a corporation can raise. And so treasurers are trained to balance that and ensure that they optimize their balance sheets, so that they can fund the operations of the company. So they have debt funding, and they have revenues to fund the operations and growth of the company, at the end of the day, companies or their for profit. Now, government entities are not it doesn’t mean that a government entity can’t run with without a surplus, meaning that they are bringing in more than what they’re spending. And we’ve had that in various times throughout history where the federal government earns more than what they spent, and they have surplus. And there are times where they do the opposite, they spend more of what they bring in. And when they do that, it means that the reason up towards the federal debt limit, and then we have these conversations that we’re having today. So treasures and corporations have to manage their capital, just like the government has to do it. There’s only so much you can do. At some point, you can’t do it anymore. So you have to take action to either generate more revenues, or you have to take action to adjust your budgets and cut spending that can have an impact on not only company, when a treasurer’s or CFO, companies managing their capital and cash may have impact on their organization, it can also have an impact at the federal level, which translates to impact on our economy. If we’re not spending money, and we’re reducing the amount of spend, that can have a negative impact on the economy. So you want to you want your government to continue to do things on a regular cadence, just like you want companies to continue to do things on a regular basis. So we get to this point where from a government standpoint, we’re hitting the debt limit, and the conversation is around, well, we need to raise the limit. Question is, is, is there a certain point where you say enough’s enough, and we got to deal with the debt that we have on the books. If you look over the recent decades, the amount of federal spending is increased significantly, and so has the amount of debt that we’ve taken on. I think that, at some point, the American people are gonna say, we’ve got to, we’ve got to acknowledge the situation we’re in. And we need to figure out a way to do that. There’s going to be different thoughts around how you do that, do you tax the American public more? Do you reduce your spending in the areas in terms of programs or other things that you’re doing to support the American people, there are different approaches that you can take to get there. But at the end of the day, I think at some point, we have to have one of those conversations where we figure out what the right balance is, and how we fund the things that we need to fund to keep our country gonna keep it safe, and satisfy the needs of the American people out there. And it goes the same way for a corporation that is competing against other companies that may have goods and services, they’re trying to protect their customers or clients. They’re trying to keep their business going and keep it growing. And so it’s really no different when you think of it in those terms even though the purpose of the federal government and the purpose of a for profit company is different.

 

Jason Campbell  14:33

Well you know what eight days remaining I guess until the quote unquote the hard deadline right so we can so our our elected officials have eight days to figure this thing out. And it is funny as you were talking about, you know, the basic math I mean, that’s pretty listening the concept is pretty simple, right? You just you got to find ways to either a you raised the capital, well, let’s say raise capital to debt wise you you increase your overall your revenues, right, and you gotta cut spending somewhere in that piece. Something’s got to give to To take it out of the hole. And so as you were talking about raising capital and going back to that conversation around, you know how, how to do that, and I know you’re talking about from from a government perspective. So how much how much can we issue? Right? So as we talked about, you know, selling, you know, selling debts and things of that nature, how much can we afford? What is your thoughts on that?

 

Paul Galloway  15:21

That’s a great question. You know, the spending bill, that’s for right now, I believe, is $1.5 trillion. So that gives you an idea of, they want to raise the debt limit by $1.5 trillion. Right now, President Biden, his staff, and House Speaker McCarthy, people on the Republican side, are meeting to discuss, you know, what does AI look like? So what we know is right now $1.5 trillion, is the amount of additional debt they want to put on the books. Now, how much can we spend? Well, we could spend less than that, we could spend more than that. But as we keep adding on to the amount of debt that we have outstanding, that just means that we’re going to continue to increase the amount of interest that we pay on a regular basis, as well as the outstanding principal that we have yet, starts eating into the overall cash that you have available to fund programs to support the government, and to support the American people or various different things that our government does out there. You can think of all kinds of different government agencies out there, they all serve a purpose to support our country, and protect the people and help us prosper and have the kind of life that we have here. And so they can spend more than what that debt limit is. But if they do that, that means that we’re going to be back to the table a lot sooner, and we keep adding more debt, we’re going to have more obligation. So the point at which we can’t withstand that anymore, is where we is something we want to try to avoid, at least in my opinion, we want to try to avoid that having these late day, 11th hour conversations around raising the debt limit. It’s an uncomfortable situation for everyone. Everybody who’s watching this, from a financial standpoint, markets are watching this, companies are watching this, all of our government agencies are watching this, or politicians or a lot of people are focused on this. And it’s not just in the US, it’s around the world. The US defaulting on its obligations, would you know, is something that has always been never thought of in terms of it would be reality. But you say here and you think about reality is is I think as a relatively low probability. But the reality is, is there’s some level of probability that we might not reach agreement, then the question is, how long does the Treasury have until runs out of cash? And then what are our options to avoid default? So we kind of talked about some of these things, raise the debt saili, the ability to control costs. So think about the Treasury. Treasury says, Well, you know, June one, that’s what Janet Yellen has put out there. It may be some days after June one in actual healthy, but, you know, default, avoiding default, if the debt ceiling doesn’t get risen, is the Treasury’s ability to either generate cash or utilize cash efficiently that they have on hand. So to make it last longer, it’s also the government’s ability to spend less to fund things. So not just the Treasury, but your government agencies, the ability to push things out and not spend a day but spin tomorrow. So can they control some of their spending, and they make it last longer. You may have heard some people talk about the President’s ability to use the 14th amendment. And I’m not a lawyer, so I can’t speak to this legally. But that is a lever that’s being contemplated out there. Will it be utilized? I think the probability of it being utilized is low because I believe it’s higher profit ability that the debt ceiling will be raised another option, which Janet Yellen has called this a gimmick, but it’s legitimately an option, the Treasury could meant a trillion dollar platinum coin. They could mitt this, put it in a vault, and then use it to issue a trillion dollars in debt. So that would be what backs the use of raising a trillion dollars in cash. Now, do I think that’s going to happen? No, I don’t think that’s going to happen here. Because again, I think we’re gonna come to some kind of agreement between now and June one. And we’re gonna, essentially, I like to call it kick the can down the road, because that’s what we’re doing. Every time we hit come when we have these conversations, and the debt limit gets raised, we kick the can down the road, at least that’s the way I feel. I feel like we need to address some of these things a little bit better.

 

Jason Campbell  21:07

You know, I think it’s funny, you use the kick the can, you know, analogy there. And, you know, you know, and you’re right, though, I mean, I think is a lot of it is is like, hey, it’s, you know, are we looking for permanent solvers. Because I think a lot of I think, you know, a lot of times, it’s like, there’s time to find the appropriate plan in today’s world, right, with as smart as people are, and the technologies and the models and the forecasting and everything that we have in our universe, you know, if we can send people to outer space, if we can cure diseases, we can do all these other things, but we can’t figure out how to balance our stuff, right? It’s, we’re had to figure out what’s the long term plan to resolve this, because obviously, you can’t just keep raising it, there’s, there’s a limit for a reason, right? It’s, it’s almost like, come on, you know, we gotta get the both sides of the aisle to cooperate and figure out that, like, there’s, there’s truth in these statistics, right? But they say, you know, men lie, women Line Numbers don’t lie, right? There’s, there’s true to how to a model out there, that’s gonna say this is this is the path of righteousness to get there, just the mere fact of how to try to do it on the right angle, right? I mean, there’s just got to be some form of relief down the road, you can’t keep dipping down, say, hey, we’ll deal with it. And next term, somebody else would be somebody else’s problem. And it’s now the problem is now and we got to figure out to ensure that, you know, there’s so much at stake and there’s so much at risk, from all angles, you know, to protect, like, set our credit ratings as a nation and, and how the world views us, but you know, and then within our within our nation, right, and then how it impacts the citizens and how it impacts corporations and, you know, day to day business needs and, and how transactions work and how it impacts markets, how it impacts investing, how it impacts security, there’s so many different variables that go into this. But obviously, I’m a guy believe there’s this that there’s a model out there that says, Hey, we got all of it. And here’s the plan, it’s just the mere fact that somebody’s willing to, to go forward with it. I mean, that’s just what I’m thinking here.

 

Paul Galloway  23:07

Yeah, you know, I mean, that’s, that’s certainly a thought that I’ve had as well, Jason, there’s a lot of smart people out there. And we’ve got some smart leaders to government entities, there’s a lot of politics involved in it. And that’s what makes things much more challenging. Versus, hey, I’m a leader of a for profit company. I have a board that I report to, I’ve provided my strategy to the board, the board’s okayed it, I go out and deploy on that strategy. Now, I’m either going to remain in charge, or not based on my performance. That’s what happens for for profit entities. And likewise, for the government. It’s kind of similar, because the politicians represent the people who elected them. And they’re either going to, you know, they’ve said, Hey, here’s what I’m gonna do for you. And if they aren’t able to do the things they committed to doing for the people that elected them, well, they won’t get reelected. So that’s their board. The board is the people, the each individual in the USA has the ability to vote. We have power in that insane. But the problem is, is that unlike a for profit company, you have competing desires, by politicians within organizations, not that there isn’t politics, there’s politics, but not at the same level because and for profit companies. They are gathered together for a certain strategy. They’re all driving towards the same strategy at the end of the day. They might take some different ways to get there. Before government, they have competing strategies. They have competing doing things that they’re trying to accomplish. And with that, it creates a greater challenge to effectuating how you manage all the cash that you have at the federal level. So it’s not as easy. It’s not as clear, there’s a lot of gray. It’s not black and white. And so I think our politicians have have a huge challenge ahead of them, anytime they get elected into office, to do the things that they say that they’re going to do for the people that elected them. So there’s a lot of negotiations that happen in the process, and the federal debt limit is no different. And so that’s what we have going on right now is negotiations. And both sides are negotiating for the best interests of the people they represent, which have competing thoughts. They’re not always aligned. So if you don’t have alignment, and you have competing thoughts, you end up with negotiations like this. It’s just a reality of the politics in the US and the way the US works.

 

Jason Campbell  26:16

Great conversation around the federal debt limit. And, you know, we’ll see we have eight days as the the hard line, right, that, as Treasury Secretary Yellen has has laid out. So, Paul, we’re gonna have to sit back and just kind of see how this thing plays out. And you know, a couple of things that come to mind accountability, and responsibility, and let’s get it done. Right. So Paul, thanks for joining me today on this episode of the Treasury update podcast and to our listeners. Thank you for tuning in for this episode. If there’s anything any questions, comments, concerns, please shoot us over a note at podcast@StrategicTreasurer.com.

 

Announcer  26:55

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