This is the time of year that it is popular to make predictions about the coming year.
I do not like to make predictions for the simple reason that it is too easy to be wrong.
And I do not like to be wrong. I certainly do not want to mislead my loyal readers with a poor take.
However, there is one prediction about the coming year that I am confident in making.
We are sure to see fireworks in Washington, D.C, early this year over the federal debt ceiling limit.
You may recall that in May, 2023 a debt ceiling agreement was reached between Biden and then House Speaker Kevin McCarthy (that was then approved by both houses of Congress) to do away with the debt ceiling limit until January 1, 2025. In other words, the Treasury Department had free reign to borrow as much as it desired until that date without any limit.
However, whatever the outstanding debt turned out to be on January 1, 2025 would be the new debt limit ceiling amount going forward after that date.
We are two days past this date so the debt ceiling limit has now been established going forward until the debt ceiling limit is modified.
The debt ceiling limit is established at the $36.2 trillion it was on December 31, 2024.
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| Source: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny |
When the debt ceiling deal was brokered 19 months ago total federal debt was $31.4 trillion.
Almost $5 trillion in federal debt has been added in just over a year and a half.
This is the trajectory of the federal debt since Biden took office.
That pause in early 2023 is when the last debt ceiling deal was being negotiated and the Treasury was using "extraordinary measures" to keep the paying the bills without adding new debt.
I wrote at the time that this open-ended debt ceiling limit was put in place in May, 2023 between Joe Biden and GOP House Speaker Kevin McCarthy that it was one of the crazier compromise deals I had ever seen.
It was almost impossible to understand why McCarthy agreed to it.
It was guaranteed to create havoc in the future and we will soon see its consequences.
Donald Trump clearly understands the consequences.
He is inheriting a gigantic mess that Biden and McCarthy have left for him,
That is why Trump was so vocal about the debt ceiling debacle earlier this week and pointed the blame squarely on former Speaker McCarthy.
It now falls on Trump and the Republicans in the next Congress to fix the mess.
You can be sure the Democrats are not going to be as accommodating as McCarthy was.
They will exact a pound of flesh and who knows how many other concessions on their favorite issues to agree to a debt limit deal.
This is what I wrote in my blog post 19 months ago. ("Debt Deal Disappointment") about all of this.
I foresaw the impending mess.
Now that I see what Speaker McCarthy and his GOP team "got" in these negotiations I can't help but wonder..."What were they thinking?"
It appears that they were only thinking of their survival in power.
I don't say that lightly as I understand the need to compromise and I stressed in my earlier blog post that the Republicans should remember that "discretion is the better part of valor" considering the slim majority they have in the House of Representatives.
However, when I look at the specifics of what they got in this "deal", it is not easy justifying a vote for this package.
Let's look at some of those specifics that the House is scheduled to vote on today.
The House-passed bill to raise the debt limit provided for a $1.5 trillion increase in the debt ceiling limit.
At current rates of spending, this would have probably meant that the debt ceiling would have had to be reconsidered again next Spring. This would have given the GOP additional leverage next year for other parts of their agenda.
However, the McCarthy-Biden proposal has no dollar-denominated debt ceiling limit.
Instead, it allows the federal government to borrow as much as it needs or wants until January 1, 2025.
This will mean that the debt ceiling could go up another $2 trillion, $3 trillion, $4 trillion or higher without requiring additional Congressional approval.
If we were to face a recession in the next 18 months there is no telling what the debt limit might end up being.
Notice as well that the debt ceiling limit will expire after the 2024 elections but before a new Congress will be sworn in during the first few days of January, 2025.
This means the next debt limit ceiling discussions will occur during a lame duck session of Congress and what could also involve a lame duck President.
You also have to wonder what would stop the Biden administration Secretary of Treasury from issuing as many debt obligations as they could right before the January 1, 2025 deadline?
None of this is conducive to being in the best interests of the American people.
On the other hand, it is all rather convenient for the politicians involved don't you think?
A couple things stand out in looking back at what I wrote in May, 2023.
I speculated that we might see the debt ceiling going up $2 trillion, $3 trillion, $4 trillion or higher by January, 2025.
I was low. We are almost $5 trillion higher.
And that is with no official recession having occurred.
I also wondered what would stop the Biden administration from issuing as many debt obligations as they could right before the January 1, 2025 deadline.
You can be sure that this would have been the case had Kamala Harris been elected.
However, Janet Yellen and the Treasury Department appear to have done the exact opposite now that Donald Trump and the GOP won in November.
The Treasury was actually reducing the debt level right before the January 1, 2025 deadline in order to exacerbate the situation and cause the federal government to reach its borrowing limit sooner.
They were taking cash reserves and using it to pay down the debt in the days before the January 1 debt ceiling date.
Between December 16 and December 26 federal debt held by the public was actually reduced by over $100 billion through actions of the Treasury Department.
That is why Trump made the reference to "1929" above.
The Democrats seem to be more interested in making Trump look bad than doing what is right and responsible for the country.
The federal government will not shut down immediately because of an inability to borrow after January 1.
The Treasury currently has around $600 billion in cash reserves on hand to meet obligations.
However, when Biden took office in 2021 he had $1.6 trillion in cash reserves sitting there.
The final record of the four years of Biden will show an additional $8.5 trillion in debt that was taken on in addition to burning through another $1 trillion in cash reserves.
Almost $10 trillion was spent beyond what the federal government took in from revenues in the last four years.
Nothing like leaving the cupboard bare when you check out!
We are unlikely to see the Treasury run out of money for at least a month or two at the earliest.
There is time for Congress to get their act together.
The federal government receives a higher than average amount of cash inflows during January as estimated tax payments are due that month.
If they can make it to April there will be large inflows from payments due with 2024 tax return filings.
During the 2023 debt ceiling negotiations the Treasury actually relied on accounting measures and extraordinary measures for 135 days without causing a delay or default on any federal obligations.
However, the important point here is that Trump will not be able to accomplish any of his objectives (extension of tax cuts, etc) until the debt limit issue is resolved.
At the same time, the clock is ticking and history shows that the first 100 days of any new Presidential administration is critical to its success. That is when enthusiasm for its agenda is highest and the public is most supportive of seeing those things they voted for to be enacted.
Losing that early momentum seriously jeopardizes the President's agenda.
That is where Trump finds himself.
That is also why he is fuming about the mess that has been left for him to dig out of.
Keep all of this in mind as you watch events unfold in Washington, D.C. after Trump takes office.
And also know that there will be nothing more important to the Trump agenda in the first 100 days than how the resolution of the debt ceiling limit turns out.
