Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

US debt has grown faster than national income for more than 50 years, and according to the

US constitution, Congress has to authorise all borrowing. A debt limit was put in place in

the early 20th century as part of the Second Liberty Bond Act of 1917, so that the Treasury

wouldn't need to ask for permission each time it had to issue debt. A general limit on the

federal debt was then imposed in 1939. The U.S. government

hit its borrowing limit yesterday and the U.S. Treasury is now taking extraordinary measures

to meet its debt obligations. Let's talk about why people are a bit more concerned about

the debt limit today than they have been in the past,

and what happens if Congress doesn't agree to lift the debt ceiling?

So the US Department of the Treasury pays the US government's bills, and to do this they issue

debt.

Whenever the debt ceiling is reached, it can be raised by a simple majority vote in both

houses of Congress. If Congress refuses to raise the debt limit, the Treasury then finds itself

unable to pay the government bills once its bank account at the Fed runs out. Janet Yellen,

the US Treasury Secretary, wrote a letter to Congress last week, warning

that the debt ceiling would be hit this week and that the Treasury would have to take extraordinary

measures to prevent the US from defaulting on its obligations.

Yesterday that debt ceiling was hit and the US Treasury is now taking those extraordinary

measures so that it can meet its debt obligations.

The extraordinary measures can only be expected to buy a few months of time, meaning that we can

expect a showdown between the Biden administration

...