9 Things You Need to Know About the Debt Ceiling

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The federal government is in partial shutdown mode due to disagreement on a spending plan. National parks are closed. About 800,000 government workers have been sent home without pay.

It can’t get worse than that, right?

Wrong. In mid-month, something might happen that would make the shutdown look like child’s play. What if Congress can’t agree to raise the debt ceiling — which enables the federal government to borrow money to pay the bills it has already incurred? Comparing the current budget squabble to a debt ceiling impasse is like comparing a bounced check with a bankruptcy. Failure to raise the debt ceiling will directly affect you, along with millions more throughout the world.

In the following video, founder Stacy Johnson interviews Dr. Albert Williams, an associate professor of economics with Nova Southeastern University and friend of Money Talks News. He explains in simple terms what the debt ceiling is and why it’s so important. Check it out, then read on for more.

Now, here are nine things about the debt ceiling every American should know:

1. What the debt ceiling is

When you spend more than you make, your only option to pay the bills is borrowing money. Uncle Sam has been doing it, off and on, since we got together and formed a country.

But like any of us, there’s a cap to Uncle Sam’s credit line, a ceiling on the amount he can borrow. And that ceiling can’t be increased without permission from Congress. Sometimes the granting of that permission slips by unnoticed; other times (like now and in 2011) it becomes a pivotal point for partisan politics.

2. What the debt ceiling isn’t

The debt ceiling has nothing to do with more government spending. It gives the government the ability to borrow money to pay the bills it already has.

Think of it as you would your car payment. If you borrow to buy a $25,000 car, you’ve already spent the money. If you don’t have the cash to make the payments, your only option, other than defaulting on the loan, is to borrow more.

3. How much the U.S. owes

Right now the U.S. debt is $16.9 trillion and climbing.

4. How the idea of the debt ceiling came about

The idea for requiring congressional approval prior to raising the amount the government can borrow came about in 1917, as the U.S. entered World War I. That’s when Congress agreed to give the government the flexibility to borrow money when necessary, up to a certain limit. Before then, Congress had to vote every time the government needed to borrow money.

In theory, forcing the president to obtain congressional approval to borrow should provide checks and balances that would prohibit our nation’s debt from becoming a problem. Many would argue, however, that it hasn’t worked. 

5. How often this is an issue

According to the U.S. Department of the Treasury, “Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.”

6. What will happen if Congress doesn’t raise the debt ceiling in time

If Congress doesn’t raise the debt ceiling by the day it’s reached in mid-October, a few days probably won’t matter. But ultimately the U.S. Treasury won’t be able to borrow the money it needs to pay all of the country’s bills when they’re due.

The government will be forced to do what you’d be forced to do in a similar situation: decide which bills to pay and which to delay. Not a pretty picture.

7. The worst that can happen

If you depend on borrowing to pay the bills, your inability to borrow more will result in some bills going unpaid. This will not only upset creditors who get stiffed, it will also make your remaining creditors nervous, because they could be next.

Result? Those not getting paid will refuse to deal with you and those still getting paid will demand higher interest rates because you’re now much riskier to deal with.

If the U.S. misses payments on its existing debt or can’t pay its other bills, those not getting paid will be upset, and those still getting paid will demand much higher interest for assuming much greater risk.

In short, in the same way a bank will raise your credit card rate if you miss a payment, interest rates on U.S. Treasury bills, notes and bonds will immediately and radically increase.

Rising interest rates on our debt not only costs us more money, it also costs something way more important — reputation. Without confidence in our economy, investors worldwide will avoid our stock and bond markets like the plague. The dollar will decline in value, which means higher prices for imports, like oil. Securities markets will crash, interest rates will rise across the board, and a worldwide recession rivaling the one we’re still recovering from — if not worse — will almost certainly ensue.

8. What has happened in the past

Congress has never refused to raise the debt ceiling. There have been times when it looked dicey — including in 2011, when the U.S. credit rating fell from AAA to AA – as a result. But thus far, cooler heads have always prevailed.

9. What you can do

There are lots of things in politics that are more show than substance. This isn’t one of them.

As should be clear by now, using the debt ceiling as a bargaining chip is playing Russian roulette with the world’s largest and most successful economy.

That doesn’t mean there should never be negotiations about the debt ceiling. The reason we have a debt ceiling is so Congress and the president will be forced to confront the fact they’re spending more than they’re taking in. And that makes approaching the debt ceiling a good time to talk about what can be done to lower our nation’s debt and deficit spending.

But nobody — especially a minority of congressmen, whether left or right — should dare to take our national well-being hostage simply to advance a partisan political agenda.

There’s a big difference between saying “Before we raise the debt ceiling, let’s agree on a plan to reduce the deficit,” and “If you don’t agree to effectively repeal a law passed by a majority in Congress three years ago, we’ll ruin the world’s economy.”

So do some reading, form your own opinion, then contact your elected officials and offer it to them. And when you’re done, share those opinions on our Facebook page.

Stacy Johnson contributed to this report.

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Comments & discussion

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  • Joseph Freitas

    I disagree. I would say that continuing to implement costly long term permanent programs funded through debt is playing roulette with the economy. The president doesn’t take the debt seriously, obviously, or he wouldn’t continue to spend recklessly. The debt limit is the only tool left to stop this madness. I would rather default, regroup and redirect our course now rather than later. If you were in a sinking ship you wouldn’t wait for the boat to capsize before you started bailing water, you would start when you notice the problem.

    • FJL

      Define reckless spending. Is invading two countries, not paying for it, and lowering taxes on the rich reckless? Unless you pay off a loan with interest attached completely, the debt raises. We are paying the debt incurred over many years and presidents. And spending recklessly…on what? One of the reasons the economy stinks is the austerity measures… BTW-The deficit has been cut in half over the last 6 years.

  • Brenda

    With the looming threat of the debt ceiling not being raised, do you have any recommendations on what to do with my Federal TSP account? Would it be smart to put it all in the General Fund now?

  • Elizabeth Cook

    Isn’t No. 6 untrue? Raising the debt ceiling would be used, not to pay the bills, but to pay the INTEREST on those bills. Correct?

    • ghortej

      I believe the interest is part of the bills. Like when you get a bill from your credit card, it includes any interest you owe. And you can’t simply refuse to pay the interest on your credit card because you don’t want to.

      • BomberBuck

        That is only half the story since the government only needs to pay the interest on the debt to keep from defaulting. Just like the credit card company only requires you to make the minumum payment and not the entire amount each month.

        • ghortej

          Ok, imperfect example. With a credit card, if you only pay the minimum, Visa essentially gives you a loan for the rest of what you owe, and the people and companies you purchased goods and services from still get paid.

          If the government does not pay it’s bills, there’s no one to float the money, and the companies with government contracts don’t get paid. Your parents or grandparents who depend on Social Security checks wont receive them. Government workers don’t get paychecks. Etc.

          If the government only pays the interest on our national debt, then all of the other checks the government writes each month don’t get sent out. And all of the people and companies relying on that money, don’t receive it.

          Imagine you own a company that produces widgets for the government. Last month, the government ordered 1,000 widgets, which you produced and delivered. That production cost your business money, but it’s ok since you sent the government an invoice which will cover your out of pocket expenses plus some. If the government decides not to pay that invoice on time, it could and probably would have serious consequences for your company. And if the non-payment is so widespread that it includes every single company invoicing the government, it could and would have serious consequences for the economy as a whole.

          • BomberBuck

            [This response already posted to a similar sub-thread]
            The problem is you are assuming the government is powerless to stop irresponsible spending. I don’t believe it. I also don’t know the last time when the President presented his budget on time as required by law (maybe his first one) or when the Democrat controlled Senate even presented a budget as required by law which indicates to me neither is serious about budgetting, spending cuts or deficit reduction. President Bush–who was not a shy spender of America’s treasure–left office with $10 Trillion in debt, President Obama has driven it up to nearly $17 Trillion in 5 years with no end of the increases in sight. Something must be done and perhaps the answer is holding up an incease in the debt ceiling for a few weeks/months (with no default since the interest is paid and since China is our largest debt holder I doubt they will have a cash flow problem. It’s not a bunch of small businesses like you’re implying). Hopefully, this will allow the government to find spending cuts for the 2014 budget so we can have a manageable debt to pass on to the ever shrinking percentage of tax-paying Americans.

  • A. Lincoln

    Point #2 above is not true. The debt ceiling IS connected to further government spending–intimately and directly connected. Using the writer’s own analogy, if you buy a car that you can’t afford, and you try to get more credit to make the payments but cannot, you must find the money by reducing other spending. The government is made of people, and like all other people, the only way to rein in their spending is to stop extending them credit. The writer claims that cutting them off cold-turkey would cause a global meltdown. Then let me ask you: When is the right time to make an addict quit? If you wait two more years, will it get easier, or harder? You worry that the cure might kill him; I assure you, the addiction will.

    • ghortej

      The debt ceiling doesn’t give the US more credit. It’s not like applying for a new loan, it’s simply authorizing payment of what’s already owed.

      The analogy of a credit card works here. If you get a credit card and go out and buy $1,000 worth of stuff, when the bill comes, you’ll have to sign a check to pay the bill. But let’s suppose that you and your wife agreed that you would only spend $500 a month on the credit card.

      Obviously, $500 can’t cover the whole $1,000 bill. So you go to your wife and ask for her permission to raise your “debt ceiling” so you can pay the whole $1,000. If your wife refuses, it doesn’t change the fact that you still owe $1,000. And if you don’t pay the whole bill, next month you’re going to owe even more because there’s interest. So your best course of action is to pay the whole bill and resolve to spend less next month.

      • BomberBuck

        That is NOT your best course of action since you just rewarded and encouraged the husband for his fiscal irresponsibility. So, to continue this example, this is what a responsible family would do: They’d make the $500 payment as was agreed to and budgeted for. Since they made at least the minimum payment (similar to making the interest payment on the national debt) they do not default. Their credit rating doesn’t suffer. The interest rate on their line of credit doesn’t increase. True, they incur a small interest charge which is manageable given the wive’s next actions: She takes away (or cuts up) the husband’s credit card because he can’t be trusted with the family finances. He knew the budgeted amount and the credit card limits but he irresponsibly ran up charges to buy “stuff” for his ne’r-do-well friends so they’ll like him and vote to keep him as the president of their Country Club where the husband golfs excessively instead of going to work. This narcissistic focus on his needs and not the family’s is part of the reason they ended up in the financial position they’re in. They husband explains he needs to keep spending money in order to cultivate contacts and make new business relationships, he says, “Honey, we have to spend money to make money. We need to spend our way to financial freedom,” so he continues in his reckless ways. Soon all love has gone out of the marriage and the wife impeaches, er I mean divorces the husband and throws him and all his loser buddies out of the House (i.e., seat of power).

        • ghortej

          [I posted this in response to another comment, but it works here as well...]

          Ok, imperfect example. With a credit card, if you only pay the minimum, Visa essentially gives you a loan for the rest of what you owe, and the people and companies you purchased goods and services from still get paid.

          If the government does not pay it’s bills, there’s no one to float the money, and the companies with government contracts don’t get paid. Your parents or grandparents who depend on Social Security checks wont receive them. Government workers don’t get paychecks. Etc.

          If the government only pays the interest on our national debt, then all of the other checks the government writes each month don’t get sent out. And all of the people and companies relying on that money, don’t receive it.

          Imagine you own a company that produces widgets for the government. Last month, the government ordered 1,000 widgets, which you produced and delivered. That production cost your business money, but it’s ok since you sent the government an invoice which will cover your out of pocket expenses plus some. If the government decides not to pay that invoice on time, it could and probably would have serious consequences for your company. And if the non-payment is so widespread that it includes every single company invoicing the government, it could and would have serious consequences for the economy as a whole.

          • BomberBuck

            The problem is you are assuming the government is powerless to stop irresponsible spending. I don’t believe it. i also don’t know the last time when the President presented his budget on time as required by law (maybe his first one) or when the Democrat controlled Senate even presented a budget as required by law which indicates to me neither is serious about budgetting, spending cuts or deficit reduction. President Bush–who was not a shy spender of America’s treasure–left office with $10 Trillion in debt, President Obama has driven it up to nearly $17 Trillion in 5 years with no end of the increases in sight. Something must be done and perhaps the answer is holding up an incease in the debt ceiling for a few weeks/months (with no default since the interest is paid and since China is our largest debt holder I doubt they will have a cash flow problem. It’s not a bunch of small businesses like you’re implying). Hopefully, this will allow the government to find spending cuts for the 2014 budget so we can have a manageable debt to pass on to the ever shrinking percentage of tax-paying Americans.

  • BomberBuck

    What? This is another biased “news story” being pushed off as a fact. Case in point, #8, the U.S. credit rating fell from AAA to AA+ because we had too much debt, not because the Congress resisted raising the debt ceiling in 2011. Very misleading.

    • ghortej

      The credit rating isn’t about how much debt the country has, it’s about how likely it is to repay it.

      Much like your credit score is not based on how much debt you have, only how well you’ve done at paying your bill in the past. If you miss a payment, your credit score goes down. Similarly, the risk the United States would “miss a payment” by refusing to raise the debt ceiling has caused our national credit score to go down.

  • kman1

    I would say that Congress is on the right step. Defund Obamacare saving a good chunk of money. Now hear me out people before you spout off. Obamacare or ACA whichever you want to call it has lied to every American out there.
    I finally got through the site and the final verdict is thus. My wife and I are the only two seeing our kids are grown and on own. According to the Federal Government standards we will make less then $65,000.00 this year and next. Thus referring us back to Medicaid in our state which is Texas but by Texas standards we don’t qualify for Medicaid. Which means they refuse us Healthcare and seeing we don’t make enough by government standards we are exempt from having to get Health Insurance or we can get it the government paying $213 a month for a policy. And if we choose not to get Health Insurance we will not get fined either for not having it.
    But what does it have to do with the debt ceiling and no more spending. Obamacare is actually going to increase the spending because for billions of people the Government is going to shell out billions of more dollars just for Health Insurance. Which hasn’t even taken effect yet. So is Congress right or wrong now requesting Obamacare be tabled.
    So Congress is right on this one and the Senate needs to agree we can’t afford to spend billions we don’t have.
    By the way figure it out $213 per person per month now times a year adds up to what. That is how much more money the United States will have to borrow to fund Obamacare. Because those having to pay the tax on it will no where be enough to fund this program.
    Look at those who don’t have Health Insurance and it’s those who can’t afford it in the first place and which will put them probably in the same place we are.

    • ghortej

      You don’t qualify for Medicaid in your state because your governor and legislature refused the federal funds that would’ve covered 100% of the costs of expanding Medicaid to you and your wife. So, write to them.

      And raising the debt ceiling is simply about paying for the things we’ve already bought. It’s like if you got a credit card and purchased $1,000 worth of stuff. Then when the bill came, you said “I don’t want to go further into debt, so I’m not going to pay the bill.” Not paying the bill doesn’t erase the debt, it just makes it much worse.