Debt Ceiling in US under Obama Administration
A “debt ceiling” is the maximum amount of debt that a government can take on. When a country borrows, it incurs debt. In an effort to prevent governments from borrowing in a reckless manner, a debt ceiling was imposed in 1917. The debt ceiling began with the Second Liberty Bond Act of 1917, and helped finance the United States’ entry into World War I. By allowing the U.S. Treasury to issue long-term Liberty Bonds and short-term debt instruments, the federal government held down its interest costs.
The government currently spends more money than it brings in through revenue; this translates into a deficit and a growing debt. There is also a limit on how high the debt can run. The debt ceiling first imposed in 1917 was set at $11.5 billion. Today, the debt ceiling is set at $16.4 trillion. Once the government broaches this limit, it becomes more difficult for it to borrow money. At the same time, Congress can vote to increase the debt ceiling and has numerous times. If the debt ceiling is not raised, interest payments on bonds would not be met and the country would default on its loans.
Debt increases when the government sells debt to the public to finance budget deficits. This increases the amount of debt held by the public. Debt also increases when the government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases the amount of debt held by government accounts. Combined, the debt held by the public and the debt held by government accounts is the total federal debt.
Reflecting on this past Thanksgiving weekend, there was a lot to be thankful for, especially if you have been long in the stock market for the past four years. Now is a time for reflection.
The advance in the stock market has been stellar following the bottom in March 2009. The S&P 500 is up 171% since March 6, 2009 for a four-year annualized gain of about 38%.
In Japan, the Nikkei 225 is at a six-year high and over in Germany, the benchmark DAX is also at a record high.
However, the records in the stock markets are falling, not just in good old America, but worldwide. Of course, there are the exceptions, such as China, which I still consider to be undervalued and worth a look for investors searching for growth in foreign stock markets. In China, you can play almost anything due to the country’s insatiable appetite for goods and services. Some of the top areas for growth in China are the technology, health care, travel, and financial services sectors.
Yet while all of the stock market records are being set, I wonder if this is simply the new reality for stocks, or are we just setting ourselves up for a massive hangover when stocks fall?
The Russell 2000, for instance, is a play on the economy. The idea is that small companies tend to fare better when the economy recovers, as these companies tend to be more flexible. The index is up over 35% this year and more than 40% year-to-date. That’s a great advance, but the index is also trading at over 70 times its … Read More
Whoopee for Wall Street, investors, and the stock market!
No, I’m not “celebrating” the resolution of the government impasse or debt ceiling issues, but rather the expectations that the easy money may continue to flow.
As widely expected, Janet Yellen will become the next Federal Reserve chairman, replacing fellow easy money supporter Ben Bernanke when he says good riddance to the Federal Reserve in January.
With Yellen to become the first female chairman of the most powerful—but broke—central bank in the world, as far as the quantitative easing currently under debate, it will likely remain status quo. If this happens, then expect the easy money to continue to drive up stocks in 2014. You could continue to make tons of money by simply adding to existing stock positions.
Yellen is a big believer in using the government and the Federal Reserve to drive the economy, even as it’s becoming obvious that Bernanke’s strategy has largely failed. The economy, housing market, and the jobs market have strengthened, but this all cost trillions of dollars. And to make matters worse, the country’s economy continues to move along at a lackluster pace. There are also limited jobs out there for the 21 million Americans struggling to put food on the table.
This means that Yellen likely won’t ease off on the bond buying stimulus as fast as previous favorite Larry Summers would have if he decided to keep his name in the running for the Federal Reserve head.
In my view, the appointment of a Bernanke clone is worrisome. Hey, maybe she will be different in leading the charge, versus her current position … Read More