Almost every year, the government spends more money than it takes in. The yearly difference in those amounts (i.e. spending minus revenues) is the deficit. If you add up all of our deficits (plus the occasional surplus), that's our total debt, measured in this ticking "debt clock" below:
However, Congress sets a limit on how much debt the federal government can take on. That's the debt ceiling.
How often do we hit the debt ceiling?
Wait. We already hit the debt ceiling?! Why hasn't everything gone horribly wrong?
Because the Treasury Department has been using what it calls "extraordinary measures" to prevent us from actually breaching the debt ceiling. Our debt has sat at about $25 million below the $16,699,421,000,000 limit, as the Treasury has performed various actions such as delaying new investments into employee retirement funds to keep us under the debt ceiling. However, the Treasury department cannot keep doing so forever. Today, Secretary Jack Lew announced that we will officially breach the debt ceiling on October 17.
OK, so we've hit the debt ceiling, but we won't breach it until October 17. What happens then? How bad would it be?
It would be a catastrophe. Two major things happen when we breach the debt ceiling:
1. Treasury can no longer pay all of the bills that it is lawfully required to pay. It will have to choose between paying bondholders, military service members, Medicare recipients and all other aspects of government. There is no methodology for how Treasury does this and no one knows exactly who would be paid and who wouldn't. There would be mass confusion and vital aspects of the government would shut down. It would be a disaster.
2. It would also significantly increase the U.S.'s long-term debt. One of the luxuries that the U.S. government has is the ability to borrow at super-low rates, because investors deem Treasury bonds the safest asset in the world. They have never feared that the U.S. won't pay back its creditors. However, if we breach the debt ceiling, all bets are off. Creditors will have no choice but to demand higher interest rates on U.S. bonds to make up for this increased risk. In the long run, those higher interest rates will turn into nearly a trillion dollars in increased borrowing costs.
Yikes, so why don't we just raise it?
Good question. Republicans are using it as leverage to extract concessions from the president. In 2011, the last time we almost hit the debt ceiling, Republicans and Democrats agreed to a last-second deal that has now given us the $1.1 trillion in across-the-board spending cuts known as sequestration. This time around, Republicans are demanding a one-year delay in Obamacare. However, the president refuses to negotiate so that he does not set the precedent that the debt ceiling is a bargaining chip for the party not in office. The risks are too high to allow it to be used as an extortion device. Nevertheless, Republicans are undeterred and refuse to raise it without a one-year delay.
Can the president raise it without Congress?
Some journalists think that he can invoke the 14th Amendment, which states that the validity of U.S. debt cannot be questioned, and raise the debt ceiling by executive authority. Others are less certain that doing so would be legal and the president himself as ruled out using it.
So, what happens next?
Your guess is as good as mine. Some analysts think that there is no way the Republicans would ever allow us to breach the debt ceiling. Others aren't so sure. The truth is no one knows and it will be a long, scary couple of weeks while the two parties figure it out.