Debt Ceiling 2013: All Your Questions About the Deadline, Answered


If you haven’t been living as a hermit for the last week, you know the United States is getting close to reaching the debt limit and there’s a fight in Congress about raising it. But you aren’t sure what the debt limit actually is, what happens if it isn’t raised, or why Congress is fighting over it. So here’s a guide to the debt limit, its history, and the current conflict. 

The debt limit, also called the debt ceiling, is the total amount of debt the federal government can have. Before the debt limit existed, Congress approved every bond issuance the Treasury Department used to finance the national debt. This made it hard to raise money quickly during emergencies, so, starting with the Liberty Bond Acts in 1917, Congress began giving more leeway to the Treasury. By 1939, the current debt limit system was essentially in place — Congress establishes the total amount of debt the government can have and leaves everything else to the Treasury.

Despite its name, raising the debt limit has nothing to do with actually increasing the federal debt. Spending decisions are made during the appropriations process. Raising the debt limit does not create new spending but authorizing the Treasury Department to fund previously agreed upon spending. If the debt ceiling is not raised, the debt doesn’t decrease, it just stops being financed.

Currently, the debt limit is $16.394 trillion. The federal debt actually reached the debt limit in May but the Treasury Department has been using accounting gimmicks to keep borrowing until the debt limit is increased. When those gimmicks stop working, which will happen either on October 17 or October 20, the consequences will be either bad or very bad.

In the worst case scenario, failure to raise the debt limit would cause the U.S. to default on the debt we currently have. Since deficit spending is funded by the sale of Treasury Bonds, the government needs to make regular payments to its’ bondholders. (For a simple explainer on bonds, see here.) If those payments are not made, interest rates rapidly increase. Since bond markets rely on government rates as a price indicator, everybody who wanted to borrow money would have to pay more interest, whether it was a car loan, mortgage, or something else.

Financial experts think that the government could avoid default by prioritizing bond payments over other federal spending. Even if that happens though, being unable to finance federal spending would lead to plenty of pain for average Americans. The government would be unable to pay its regular bills, so everything that relies on a government payment would be stop.

Right now, America has a “government shutdown” because of Congress’s failure to pass appropriations bills. But some major parts of the government — the military, law enforcement, and major entitlement programs — are considered “essential services” and therefore are still working. If the debt limit is not raised, those services would be dramatically scaled back and eventually stop, since the government simply couldn’t pay to operate them anymore.

If a default is so bad, how come Congress is fighting over raising the debt limit? It’s because President Obama and Congressional Democrats demand that the debt limit is increased without any cuts to Obamacare or other federal spending, and Republicans demand that the cuts are made. Until one side gives in, the debt limit stays where it is.

In 2011 and 2012, conflict over the debt limit ended in compromises where the debt limit was raised in exchange for cuts in federal spending. A compromise looks a less likely this time around. The White House’s chief negotiator, Vice President Joe Biden, has not been involved in the process. Congressional Democrats seem less willing to make a deal this time, as they view Republican intransigence as a weapon for the midterm elections and think that if they give in, Republicans will just make more demands during the next debt limit increase. Republicans fear being victims of primary challenges by their activist base if they concede on the debt ceiling.

This adds up to political gridlock, and Americans everywhere will suffer unless someone budges.