The Truth about US Debt Ceiling and Default
One of the most controversial topics in US monetary policy is the debt ceiling. Let’s see what it means and what implications it has.
The debt ceiling is the maximum amount that the US government can borrow to meet its existing legal obligations. This is achieved by issuing bonds, which involves raising money by selling bonds to investors.
It was introduced in 1917, during World War I to make the federal government fiscally responsible.
So, the debt ceiling acts as a limit on debt, up to which the government can issue bonds to raise money. But what happens if the amount of debt hits that ceiling?
On one hand, what can happen is that the US government defaults and cannot pay its debts, but as you may already realize, this never happens, otherwise we would see a massive crash in the markets.
To counteract this, what they usually do is raise that ceiling (it has been done countless times already) or simply suspend that limit for a certain period, as is currently the case where the debt ceiling has been suspended from 2023 to 2025.
Currently, the US national debt is $34.39 trillion. Crazy number, huh?
The debt ceiling is modified through Congress, it is not a unilateral decision of the White House.
While it is not a short-term concern, it is true that rumors and fears occasionally resurface about how the US debt is being managed.
Pros:
- Holds the nation’s finances in check
- Can be used to fund federal operations
- Improves efficiency in the government’s ability to fund obligations
Cons:
- Can be easily raised, encouraging fiscal irresponsibility
- Lowers the U.S. credit rating and increases its cost of debt
- Controversy over whether the debt ceiling is constitutional
Summarizing:
- The debt ceiling is the maximum amount that the U.S government can borrow to meet its legal obligations by issuing bonds
- If the Treasury Department can’t pay expenses when the debt ceiling is reached, there is a risk that the U.S. will default on its debt
- The debt ceiling has been raised or suspended several times to avoid the risk of default
- There have been many showdowns over the debt ceiling, some of which have led to government shutdowns
- Shutdowns are the result of conflict between the White House and Congress, with the debt ceiling used as leverage to push budgetary agendas
This has been a brief summary of what the US debt ceiling means, what it’s for, why it’s important, and what we should consider when discussing the topic.
