US Debt Limit Is Gradually Hardening While the Nation’s Strength Weakens

America’s “soft” debt ceiling is a systemic flaw that causes spending and inflation to exceed the government’s revenue. The change from a soft debt ceiling to a “hard” one actually depends on the international financial market restraints on the demand for U.S. debt. The change in the demand function shifts with relationships among global geopolitics, economies and finance. Global multipolarization has continued to create strong competitive alternatives to U.S. debt, and there are opportunities to force the U.S. debt ceiling to change from soft to hard.

The U.S. debt ceiling is the amount of American debt that the U.S. Treasury Department can assume. The start of World War I caused a dramatic rise in government spending, and the scale of debt rapidly ballooned. Some U.S. legislators pushed Congress to pass a law that capped government debt. Congress initially introduced the idea of a debt limit in 1917, at which time the debt limit was $11.5 billion. Over the last hundred years, the U.S. debt limit has already been raised more than 100 times. Since 1960 alone, it has been raised 78 times — an average of more than once a year. This year on Jan. 19, U.S. debt had already reached the $31.4 trillion debt ceiling set on Dec. 16, 2021. Currently, the Democrats and Republicans are engaged in a fierce battle over raising the debt ceiling.* From the $11.5 billion debt ceiling in 1917 to the $31.4 trillion at the end of 2021, the U.S. debt ceiling has increased by almost 2,730 times.

No matter which party has a majority in the U.S. government, they both want to fulfill campaign promises and increase spending to gain voter support. After the debt ceiling was raised in 1960, it has been raised almost 50 times since under Republicans and about 30 times under Democrats. Republicans like to reduce taxes, while Democrats like to increase spending. To achieve these respective goals, both parties tend, and prefer, to raise the debt ceiling when they are in power.

In the past few decades, discussions have arisen over the risk of U.S. debt when the debt reaches the debt ceiling. Financial markets will reset the price of U.S. debt, and need to be compensated at a premium. When the U.S. defaults on its debt, as in 2011, the government credit rating is downgraded, creating fluctuations in the financial market. However, following each increase in the debt ceiling, the financial market has basically absorbed the risk of U.S. debt. A fundamental question is this: The U.S. has hit its debt ceiling, and even briefly defaulted, many times — why is the debt ceiling still being raised, and why do international markets still accept more and more U.S. debt?

The reason is that within the international financial market, a strong competitor that could replace U.S. debt has yet to emerge. U.S. debt is issued and used all over the world. While international investors hold approximately one-third of American-issued debt in circulation, the Federal Reserve is the largest single debt holder. As of May 18, within the Fed’s $8.5 trillion in total assets, the amount of government bonds reached about $5.2 trillion. International investors and the U.S. Fed already hold more than half the total value of debt in circulation, and investors within the U.S. hold the rest.

Because international investors hold so much U.S. debt, they can enact hard external constraints on the debt ceiling. The shift in the makeup of U.S. debt holders indicates that even though the U.S. dollar monetary system remains dominant internationally, holding U.S. debt has been affected by various factors such as geopolitical, economic and financial relationships. The demand for U.S. debt will change with the geopolitical, economic and trade changes brought about by the multipolarization of the global economy. The demand function of U.S. debt is complex.

Creating a hard constraint is difficult when the supply of U.S. debt depends on the U.S. itself, and so the debt ceiling is soft. However, a hard constraint exists for U.S. debt demand and will be determined by the appearance of another government’s bonds that can replace U.S. debt in the global financial market. From the perspective of national credit and competitiveness, if America’s soft debt ceiling gradually becomes hard, all of America’s global influence will decline significantly further.

*Editor’s Note: The bill to raise the debt ceiling was approved by Congress on June 1, 2023.

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