9 Things You Need to Know About the Debt Ceiling

Photo (cc) by Matthew Straubmuller

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
11 Small Money Moves That Will Make a Big Difference
11 Small Money Moves That Will Make a Big Difference

These small money moves will pay off big in the long run.

8 Surefire Ways to Get Rid of Debt ASAP
8 Surefire Ways to Get Rid of Debt ASAP

Here’s how to painlessly speed up your debt-reduction efforts.

7 Ways to Shop at Costco Without a Membership
7 Ways to Shop at Costco Without a Membership

You don’t necessarily need to join to get in on the warehouse store’s savings.

9 Genius Storage Solutions for Your Home
9 Genius Storage Solutions for Your Home

These creative products on Amazon will hide unsightly clutter while saving space.

The 5 Worst Home Upgrades for the Money
The 5 Worst Home Upgrades for the Money

These home improvement projects basically never pay off.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.