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Charting the Rise of America’s Debt Ceiling

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Charting the Rise in America's Debt Ceiling

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Charting the Rise of America’s Debt Ceiling

Every few years the debt ceiling standoff puts the credit of the U.S. at risk.

In January, the $31.4 trillion debt limit—the amount of debt the U.S. government can hold—was reached. That means U.S. cash reserves could be exhausted by June 1 according to Treasury Secretary Janet Yellen. Should Republicans and Democrats fail to act, the U.S. could default on its debt, causing harmful effects across the financial system.

The above graphic shows the sharp rise in the debt ceiling in recent years, pulling data from various sources including the World Bank, U.S. Department of Treasury, and Congressional Research Service.

Familiar Territory

Raising the debt ceiling is nothing new. Since 1960, it’s been raised 78 times.

In the 2023 version of the debate, Republican House Majority Leader Kevin McCarthy is asking for cuts in government spending. However, President Joe Biden argues that the debt ceiling should be increased without any strings attached. Adding to this, the sharp uptick in interest rates have been a clear reminder that rising debt levels can be precarious.

Consider that historically, interest payments on the U.S. debt have been equal to about half the cost of defense. More recently, however, the cost of servicing the debt has risen, and is now almost on par with the defense budget as a whole.

Key Moments In Recent History

Over history, raising the debt ceiling has often been a typical process for Congress.

Unlike today, agreements to raise the debt ceiling were often negotiated faster. Increased political polarization over recent years has contributed to standoffs with damaging consequences.

For instance, in 2011, an agreement was made just days before the deadline. As a result, S&P downgraded the U.S. credit rating from AAA to AA+ for the first time ever. This delay cost an estimated $1.3 billion in extra costs to the government that year.

Before then, the government shut down twice between 1995 and 1996 as President Bill Clinton and Republican House Speaker Newt Gingrich went head-to-head. Over a million government workers were furloughed for a week in late November 1995 before the debt limit was raised.

What Happens Now?

Today, Republicans and Democrats have less than two weeks to reach an agreement.

If Congress doesn’t make a deal the result would be that the government can’t pay its bills by taking on new debt. Payment for federal workers would be suspended, certain pension payments would get stalled, and interest payments on Treasuries would be delayed. The U.S. would default under these conditions.

Three Potential Consequences

Here are some of the potential knock-on effects if the debt ceiling isn’t raised by June 1, 2023:

1. Higher Interest Rates

Typically investors require higher interest payments as the risk of their debt holdings increase.

If the U.S. fails to pay interest payments on its debt and gets a credit downgrade, these interest payments would likely rise higher. This would impact the U.S. government’s interest payments and the cost of borrowing for businesses and households.

High interest rates can slow economic growth since it disincentivizes spending and taking on new debt. We can see in the chart below that a gloomier economic picture has already been anticipated, showing its highest probability since 1983.

Probability of a U.S. Recession based on Treasury Spreads

Historically, recessions have increased U.S. deficit spending as tax receipts fall and there is less income to help fund government activities. Additional fiscal stimulus spending can also exacerbate any budget imbalance.

Finally, higher interest rates could spell more trouble for the banking sector, which is already on edge after the collapse of Silicon Valley Bank and Signature Bank.

A rise in interest rates would push down the value of outstanding bonds, which banks hold as capital reserves. This makes it even more challenging to cover deposits, which could further increase uncertainty in the banking industry.

2. Eroding International Credibility

As the world’s reserve currency, any default on U.S. Treasuries would rattle global markets.

If its role as an ultra safe asset is undermined, a chain reaction of negative consequences could spread throughout the global financial system. Often Treasuries are held as collateral. If these debt payments fail to get paid to investors, prices would plummet, demand could crater, and global investors may shift investment elsewhere.

Investors are factoring in the risk of the U.S. not paying its bondholders.

As we can see this in the chart below, U.S. one-year credit default swap (CDS) spreads are much higher than other nations. These CDS instruments, quoted in spreads, offer insurance in the event that the U.S. defaults. The wider the spread, the greater the expected risk that the bondholder won’t be paid.

Additionally, a default could add fuel to the perception of global de-dollarization. Since 2001, the USD has slipped from 73% to 58% of global reserves.

Since Russia’s invasion of Ukraine led to steep financial sanctions, China and India are increasingly using their currencies for trade settlement. President of Russia Vladimir Putin says that two-thirds of trade is settled in yuan or roubles. Recently, China has also entered non-dollar agreements with Brazil and Kazakhstan.

3. Financial Sector Turmoil

Back at home, a debt default would hurt investor confidence in the U.S. economy. Coupled with already higher interest rates impacting costs, financial markets could see added strain. Lower investor demand could depress stock prices.

Is the Debt Ceiling Concept Flawed?

Today, U.S. government debt stands at 129% of GDP.

The annualized cost of servicing this debt has jumped an estimated 90% compared to 2011, driven by increasing debt and higher interest rates.

Some economists argue that the debt ceiling helps keep the government more fiscally responsible. Others suggest that it’s structured poorly, and that if the government approves a level of spending in its budget, that debt ceiling increases should come more automatically.

In fact, it’s worth noting that the U.S. is one of the few countries worldwide with a debt ceiling.

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Graphene: An Investor’s Guide to the Emerging Market

The market value of graphene could reach $3.75 billion by 2030. As the emerging industry shows fast growth, it also faces obstacles.

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The following content is sponsored by HydroGraph

Graphene: An Investor’s Guide to the Emerging Market

Graphene is an atomic-scale “honeycomb” that is revolutionizing the world of materials and capturing investor attention.

Experts predict that its market value could reach the billion-dollar threshold by 2027 and soar to a staggering $3.75 billion by 2030.

In this infographic sponsored by HydroGraph, we dive into everything investors need to know about this exciting industry and where it’s headed.

Promising Properties

Graphene possesses several unique physical properties which contribute to its wide range of potential applications.

  • 200 times stronger than steel
  • Harder than diamonds
  • 1,000 times lighter than paper
  • 98% transparent
  • Higher electrical conductivity than copper
  • Heat conductivity: 5 times that of copper
  • 2,630 m² of surface area per gram

Since its first successful isolation in 2004, graphene’s properties have opened the doors to a multitude of commercial applications and products.

Applications of Graphene

Graphene has permeated numerous sectors like electronics, energy, and healthcare because of its impressive array of end uses.

IndustryRevenue CAGR of Graphene Across Industries, 2022-2027
Biomedical and Healthcare52%
Electronics and Telecommunications34%
Energy25%
Aerospace and Defense16%
Other End-User Industries17%

Graphene’s antibacterial properties make it highly suitable for medical instruments and implants. Furthermore, it has shown remarkable potential in helping treat diseases such as cancer.

Another one of the material’s applications is its ability to emit high-speed light pulses, or to combine graphene’s thinness and high-conductivity to create the tiniest possible light sources.

All in all, it’s difficult to sum up graphene’s properties and potential applications in one place. The supermaterial has been covered and cited in thousands of academic journals, and comes up with over 2 million search results on Google Scholar.

Graphene Commercialization

Graphene has evolved from a scientific breakthrough to a commercial reality in less than two decades, putting it firmly on the radar of many future-focused investors.

But despite the strides the industry is making, it is still in its infancy, and therefore challenges exist on the path to widespread adoption. Here are the top five commercialization obstacles perceived by industry players.

Obstacle% of survey respondents
Cost31%
Production Methods, Scaling, and Distribution21%
Material Quality/Consistency17%
Lack of Knowledge/Awareness15%
Dispersion/Handling14%

When transitioning cutting-edge materials from the laboratory to consumer products, challenges like these can be expected. But one company is tackling them head-on.

By producing 99.8% pure graphene, and ensuring batch-to-batch consistency, HydroGraph is helping meet the growing demand for graphene products across industries while addressing challenges like cost, scale, and quality.

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Interested in learning more? Explore investment opportunities with HydroGraph now.

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