Knowing Your Government: What is The Debt Ceiling?

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debt-ceilingThe debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments.

It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

What the debt ceiling is not paying:

  • Payment for any current administration bills
  • Additional expenditure bills

What it is paying:

  • Paying for previous wars, the bailout of Wall street and Bush administration debts

The United States has never reached the point of default where the Treasury is unable to pay its obligations. If this situation were to occur, it is unclear whether the Treasury would be able to prioritize payments on debt to avoid a default on its debt obligations, but it would at least have to default on some of its non-debt obligations. A default could trigger a variety of economic problems including a financial crisis and a decline in output that would put the country into a recession. In 2011 the United States reached a point of near default. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs. Congress raised the debt limit with the Budget Control Act of 2011, which created the fiscal cliff and set a new debt ceiling that was reached on December 31, 2012. The Treasury has adopted extraordinary measures to avoid a default on its obligations. On February 4, 2013, President Barack Obama signed a suspension of the debt ceiling that ran until May 19, 2013. After May 19, the debt ceiling was raised to $16.699 trillion, the level of debt incurred during the suspension, and the Treasury resumed extraordinary measures.

The Treasury has said it is not set up to prioritize payments, and it’s not clear that it would be legal to do so. Given this situation, the Treasury would simply delay payments if funds could not be raised through extraordinary measures and the debt ceiling had not been raised. This would put a freeze on 7% of the nation’s GDP, a contraction greater than the Great Recession.

The government has hit the debt ceiling before, and always raised it in time to avert a default on its obligations. But the current game of debt-ceiling chicken is stacking up as more than run-of-the-mill political brinkmanship. As the standoff continues, our livelihoods and financial security are held hostage.

If, in fact, the federal government goes into default on its debt, major consequences could immediately engulf financial markets and, by extension, everyone with a stake in the U.S. economy.

If you have any questions leave them below and we will try and get them answered.

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