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How the National Debt, Debt Ceiling, and a Trade Deficit Work Together

Wednesday, January 18, 2023 01:22 PM | Neal Farmer
How the National Debt, Debt Ceiling, and a Trade Deficit Work Together

Seriously, all these concerns over the national debt, debt ceiling, and trade deficits have been ongoing for years and have yet to actually materialize.

Is there really a scenario out there where the world’s largest economy defaults on its debts?

Possibly, if the United States decides to not raise its debt ceiling.

But then again, the debt ceiling is just an arbitrary number that Congress sets

So yes, the U.S. will almost assuredly raise the debt ceiling once again as it reaches its limit with the only caveat being how much will it be raised and how long will the two sides fight before an agreement is reached. The more important question is whether this level of debt is a real concern and how the debt ceiling and trade deficit really play into it.

What is the Deficit?

When the government spends more money than it brings in with taxes, the difference is called the deficit. When tax revenue exceeds the amount spent by government, this is called a surplus. These are both annual numbers, meaning "the deficit" means the spending minus revenue for a single year.

What is the National Debt?

When the government runs a deficit, it borrows money by selling bonds in order to have enough cash to spend. This is how most governments fund themselves. The United States in particular not having been debt free since 1837. Now, just because having debt is normal it is also usually understood that governments should have the ability to pay back debt if need be.

The National Debt is the total of all the deficits, minus all the surpluses the government has ever run. Currently at $31 trillion, it would take a very long time to retire that debt completely based on the last two years with a budget surplus, 2000 and 2001 at $237 billion and $127 billion, respectively.

Debt Ceiling

The debt ceiling is the maximum allowable amount of the national debt. This figure is set by Congress. It has at times been a dollar figure, but it has also been suspended at certain times to allow the government to borrow whatever it needs up to a certain date.

Importantly, the debt ceiling  is different from the budget. Budgets, also passed by Congress, set tax rates and spending levels. Which is how we end up with an annual deficit or surplus. The debt ceiling gives the Treasury permission to borrow up to a certain amount of money.

Congress frequently approves budgets that will require borrowing above the debt limit. Which is why we have political showdowns from time to time about raising the debt limit.

Both the budget and the debt limit are laws. It is unclear what the Treasury and other Executive Branch offices would do in a case where the debt limit isn't raised in time, as both exceeding the debt limit and not spending the money approved by Congress would both be illegal.

This conundrum has led to a number of proposals that would get around the debt ceiling, such as minting high-value platinum coins.

Trade Balance

While also frequently described as a deficit, the country's trade balance is not directly related to the national debt. The two have also been called “twin deficits” in the past when increasing by similar amounts with both coming from similar economic fundamentals.

The trade deficit is the difference between what the U.S. imports (in dollars) and what it exports (also in dollars).

A large trade deficit can have an impact on the national debt as higher budget deficits sometimes lead to lead to higher trade deficits. Of that $31 trillion national debt, $7.5 trillion  is held by foreign countries with Japan, China, and the U.K. holding the most at $1.2 trillion, $970 billion, and $634 billion respectively.

One way to think about this is that the U.S. imports goods and services from those countries and exports Treasuries.

The current U.S. trade deficit stands at $61.5 billion as the United States continues to import more than it exports. The last time it had a trade surplus was 1975.

Wrapping Up

The deficit, national debt and debt ceiling  have a sometimes bizarre relationship with each other although it is frequently hard to see the direct impact of them in everyday life. Unfortunately, the U.S. is again getting close to the debt ceiling, which means we are likely to see politicians put the economy at risk when they've already approved this year's budget.

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