Carlin Financial

In simple terms, the debt ceiling is the total amount of debt that Con­gress has authorized the Treasury to incur backed by the full faith and credit of the republic. And that au­thorization currently is limited to roughly $14.3 trillion. That may seem like plenty of headroom, but we are bumping up against the ceil­ing, at least the way Congress is le­gally bound to define it.

The biggest chunk of the debt is in the form of outstanding Treasury securities. That’s the “debt held by the public” which at the end of fiscal 2010 (last September 30th) stood at just over $9 trillion. Eight months into the current fiscal year the Trea­sury’s Debt Position and Activity Report shows $9.72 trillion in debt held by the public. By the way, that “public” is vast; about half of that outstanding debt is held by non-U.S. investors: foreign nations, institu­tions, and individuals.

So, if total debt held by the pub­lic is just approaching $10 trillion, why are we bumping up against a $14.3 trillion ceiling? That takes us into the world of the Social Security and Medicare Trust Funds. Those “funds” are a historical accounting of the excess of payroll tax collec­tions over Social Security and Medi­care expenditures. Over the past 25 years that excess has been consider­able, and by law it must be credited to the respective Trust Funds.

Of course the actual cash has been spent along the way, leaving the Trust Funds with special, non-traded Treasury securities on which the Funds are credited interest as time marches along. These accumu­lated “balances” provide a useful re­cord as well as the legal framework within which Social Security and Medicare benefits will continue to flow at whatever point payroll taxes fall short of those outlays.

Those Trust Funds represent the largest portion of what Treasury’s Debt Position and Activity Report lists as Intra-governmental Hold­ings, totaling $4.62 trillion as of May 31st. It may seem counterin­tuitive, but the law requires those “balances” to be counted as part of the total debt capped by the ceiling.

Whether this truly constitutes a debt or just a formal recognition of a compact across generations makes for an interesting discussion. But as the accompanying table shows, the plain old debt held by the public is growing plenty fast enough to lend a sense of urgency to the ceiling de­bate and highlight our political and philosophical divisions.