Recently, congress has been facing a deadline to raise the debt ceiling in order to prevent a default on the national debt. Congress has until mid-October, to reach a deal to raise the debt ceiling (or federal borrowing limit) before the government runs out of money to pay its bills.
But what does the debt ceiling do? Does it even matter?
The debt ceiling was introduced during the 20th century wars before Congress had to approve each specific borrowing instance. The ceiling was needed to accrue more overall debt. Since its introduction, the debt ceiling has been raised 98 times due to the U.S. routine of spending more money than it raises in revenue. When the U.S. spends more than it raises in revenue, a deficit is created. To cover these deficits, the Treasury Department issues government securities. These securities are similar to a loan, as investors give the government money with the promise of getting their money back with added interest. This security loan is then added to the national debt. The debt ceiling therefore is the Congress passed limit that the U.S. can borrow. Raising the debt ceiling doesn’t mean that spending will increase, instead it hints that the Treasury can issue more securities to cover spending that Congress has previously authorized. Once the ceiling is ready again, no more debt can be issued until lawmakers vote to raise the ceiling. The Treasury does have cash reserves to pay the governments bills, but those will be inadequate and eventually run out.
If the ceiling is not passed and the government runs out of cash, it will therefore miss payments on its bills. These bills include monthly Social Security and veterans benefits, or paychecks to federal employees and members of the military. As estimated by Goldman Sachs, the U.S. Treasury would need to halt more than 40% of payments if the ceiling is not raised. Those halted payments would include ones to U.S. households. If the ceiling is not raised, additional disruptions would affect individuals and businesses who’s loan rates are tied to the yields of Treasury securities.
Therefore, the ceiling is very important.
If Congress doesn’t vote to raise the ceiling, major economic impacts will follow. Treasury Secretary Janet Yellen has said the government will run out of money mid-October without a ceiling raise. This would crush financial markets and raise borrowing cost. Article Link
3 comments:
This is a truly well written summary, Ian. I sometimes wonder why there even exists a Debt Ceiling in the US. Probably it is a material incentive to raise taxes and generate revenue, instead of relying on the Treasury to pay the bills. But what is the point and shouldn't there be a final point where the raising debt ceiling will no longer be effective? For me, it seems very contradictory to have a debt ceiling and also allow to raise it whenever the congress wants to.
While there is always speculation and unease as to what would happen if Congress did not raise the debt ceiling, it seems extremely unlikely that this would happen. The U.S. government has not gone into default before in all of U.S. history, and this would cause an extreme blow to the economy. To add to your article some of the specific impacts that a default would have on citizens are: U.S. troops and federal civilian employees would not be paid, veterans could get their compensation/pension payments late, and millions of Americans on food assistance would see these benefits stop. This could impact more than just our economy, it could impact the livelihood of our citizens.
I truly think that they will always raise the debt ceiling if necessary. The events that would occur if they did default would be so catastrophic that it would bring great depression levels of economic depression that the world/U.S has never seen before.
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