What’s the debt ceiling? Basically it is the legal limit on borrowing by the federal government. The cap set by Congress applies to debt owed to the public (i.e., anyone who buys U.S. bonds) plus debt owed to federal government trust funds such as those for Social Security and Medicare. The country’s cap is currently set at $14.3 trillion which was officially reached on May 16, 2011. Treasury Secretary Tim Geithner told Congress he would have to suspend investments in federal retirement funds until August 2, in order to create room for government to continue borrowing in the debt markets.
The first limit was set in 1917 and set at $11.5 billion, according to the Center for a Responsible Federal Budget. The ceiling has been raised almost 100 times since it was initially established and has gone from less than $1 trillion in the 1980’s to $6 trillion in the 1990’s. The most recent time the ceiling was boosted was in February 2010. In theory, the limit is supposed to help Congress control spending. In reality it doesn’t. If Congress exceeds the debt ceiling then the Treasury would not have authority to borrow any more money, which can be a problem because the government borrows money to make up the difference between what it spends and what it takes in. Due to this limit expiration, Geithner would have to pick and choose who to pay nd who not to pay daily. Geithner said this would be similar to a homeowner who pays his mortgage but puts off his car loan, insurance premiums, and credit cards. The mortgage is paid but the homeowner’s credit could still be damaged.
Ultimately, if lawmakers fail to raise the ceiling this year, they will have two choices: cut spending or raise taxes by several hundred billion dollars. However, they could acknowledge that the country is unwilling to pay what it owes in full and the United States could effectively default on some of its loan obligations. One may question why the US has so much debt anyway. There are several reasons, but two loans underscore the problem: under former President George W. Bush, the national debt soared to $4.36 trillion because of the cost of wars in Iraq and Afghanistan and new tax cuts Bush created, and under the current presidency of Barack Obama, the debt ceiling has increased by an additional $3.9 trillion, because of the economic stimulus and decreased tax revenue during the recession.
The Treasury has never been unable to make payments as a result of reaching the debt limit. With the fragile global recovery continuing on U.S. economic stability, the debt limit issue could shake up international financial markets. Democrats and Republicans agree that if the debt limit is not raised we would be inviting an economic catastrophe. As the August 2nd deadline approaches, many Americans can only hope that our government leaders can reach an agreement about the debt ceiling so that American and international markets remain stable.