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
17 Surprising Things You Can Sell for Extra Money
17 Surprising Things You Can Sell for Extra Money

You probably don’t realize these items are worth decent cash.

12 Tech Gadgets That Make Daily Life Easier
12 Tech Gadgets That Make Daily Life Easier

These products on Amazon will ease worries and simplify your routine.

6 Investing Tools That Help You Diversify
6 Investing Tools That Help You Diversify

Here’s how you can lend to startup businesses, fund social causes or get in on investments once available only to the very rich.

10 Products That Will Help You Save Money
10 Products That Will Help You Save Money

Sometimes, spending a little cash right now can save you a lot of money down the road.

33 Home Upgrades That Cost Less Than $100
33 Home Upgrades That Cost Less Than $100

A little money goes a long way with these imaginative projects. You can do most of them yourself.

View this page without ads

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

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

8 Federal Income Tax Breaks for Homeowners
8 Federal Income Tax Breaks for Homeowners

Some of these deductions and credits are available to a wide swath of homeowners.

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.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

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.

10 Types of Retirement Income That Are Not Taxable
10 Types of Retirement Income That Are Not Taxable

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

5 Products You Should Never Buy Generic
5 Products You Should Never Buy Generic

Sometimes the brand-name version is clearly superior.

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.

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.