Explained: The USA Debt Ceiling
Debt ceiling is the maximum amount of money that the USA can borrow cumulatively by issuing bonds. This debt ceiling was created under the Second Liberty Bond Act of 1917. Whenever the US government¡¯s national debt bumps against the ceiling, the treasury department should take extraordinary measures to pay for the government expenditures and obligations until the ceiling is raised again. The debt ceiling was introduced in USA in 1917 during World...Read More
Debt ceiling is the maximum amount of money that the USA can borrow cumulatively by issuing bonds. This debt ceiling was created under the Second Liberty Bond Act of 1917. Whenever the US government¡¯s national debt bumps against the ceiling, the treasury department should take extraordinary measures to pay for the government expenditures and obligations until the ceiling is raised again. The debt ceiling was introduced in USA in 1917 during World War 1 to make the government fiscally responsible.
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But the debt ceiling has been so fluid and raised whenever necessary that there had been questions raised on whether it¡¯s effective to pursue fiscal responsibility. The debt ceiling was raised whenever the US has approached the debt ceiling limit. By hitting the limit and failing to pay interests to bondholders, the US would default (would not e able to pay the debt) which would affect the country greatly.
The US government defaulting in paying the debt is the worst-case scenario because, even a brief default the interest rates would spike and the equity prices would plunge. The short-term funding markets, which are essential to the flow of credit that helps finance the economy¡¯s day-to-day activities would also shut down. So, the US would end up in a huge crisis if it were to default.
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Because the US dollar is global currency against which the other currencies are pegged against, if the US would get into a situation where it could not pay its debt, it would lead to a downgrade of the credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a drop-off in the consumer confidence that couls shock the US financial market and also the world¡¯s economic market. This would lead to an immediate recession.
In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. After this because the spending reached the debt ceiling, the Congress had to decide whether they wanted to raise the ceiling again. Over the past century, raising the ceiling has become a common practice for the Congress. Whenever the Treasury department funds dry out, the Congress acts quickly and unanimously agree to increase the limit and sometime agree to borrow. Since 1960, the Congress has increased the debt ceiling seventy-eight times and it happened most recently in 2021.
The US Senate on Thursday (02/06/2023) passed bipartisan legislation backed by the President Joe Biden that lifts the government¡¯s $31.4 trillion debt ceiling and averted what would have been the first ever default by the US. The Senators voted 63-36 to approve the bill that had been passed on Wednesday by the House of Representatives.
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¡°This bipartisan agreement is a big win for our economy and the American people¡± said President Joe Biden and said that he would sign the bill as soon as possible. With this legislation, the limit for borrowing money will be suspended until January 2025 meaning that there would not be a set limit for their spending.
Because of this decision, America can breathe a sigh of relief for the next 2 years.
REFERENCES:
Noah Berman. (May 25, 2023). What happens when the US hits its Debt Ceiling? Retrieved from.
