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  • Writer's pictureIshfaaq Peerally

The Problem with the Debt Ceiling

Even though the problem of raising the debt ceiling might have been temporarily solved, it is still a major problem.

The Debt Ceiling is unique to the US and the main reason why it exists is because of the separation of powers between the legislative and executive branches as stated by the Constitution. The US Treasury (part of the Executive Branch) can issue debt but it has to be approved by Congress (the legislative branch). The Debt Ceiling itself has been around since 1917 as it is more efficient than having to pass a new law every time the Treasury needs to issue debt.

It may look like a good thing. There's a debt ceiling and the government cannot take unnecessary debt. But in reality, the debt kept growing. And today, the US Government needs to take debt to repay their past debt. That's why US Secretary of the Treasury Janet Yellen warned of a possibility of Default on the 18th of October. A default will cause banks to lack liquidity and this will spread throughout the financial system leading to a recession. Obviously, the stock market $SPX500 will not do well.

Warren Buffett talked about the debt ceiling at the 2011 General Meeting of Berkshire Hathaway $BRK.B . He said that it should not be here in the first place and that a default would be asinine.

While Government Shutdowns have happened in the past, and have not really affected markets that much over the long-term, a default never happened.

Even though the problem has been temporarily solved, it will come back in a few months. The most obvious solution will be for the US Treasury to issue a Trillion Dollar Coin which will then be deposited to the Federal Reserve System, which can then buy it by Quantitative Easing.

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