The Debt Ceiling

The government can spend only if there are sufficient funds to pay for the spending. When the budget is made up every year this is a spending plan for the government. The money comes from tax dollars or borrowing and there is never enough tax dollars to cover the budget so borrowing take place in the form of selling U.S. government bonds. But there is a limit to government borrowing and when that limit is reached the debt ceiling has been reached.

The debit ceiling for the U.S. Government is the upper limit of borrowing authority for the government. If that ceiling is hit the government cannot borrow any more money to pay its bills until congress passes legislation to increase the borrowing limit. Every time congress increases the borrowing limit it increases the deficit and puts the government further in debt. There is a great debate going on in this country today about the deficit and how we may be mortgaging our children’s future with excessive spending now that will burden future generations.

The government faced a financial crisis in 2011 where legislation was passed to increase the debt ceiling just as the ceiling was being reached. The legislation was signed into law on august 2nd which was the date the treasury department estimated that the borrowing authority of the U. S. would be exhausted. A few days later Standard & Poor’s reduced the credit rating of the US government bond. This was the first time in history U.S securities had been downgraded. This event caused a volatile week for financial indexes around the world but yields dropped on treasuries as investors bought U.S. government bonds for protection over the weak economy. Demand remained strong for U.S. Government bonds despite the down grading.

If the debt ceiling were not raised the government would be unable to carry out spending authorized by the budget. This situation would result in a shut down or partial shutdown of the government. This situation could also result in sovereign default, which is the failure to pay interest or principle on U.S. bonds on time.

Both houses of congress must approve an increase to the debt ceiling. Both parties wanted legislation to increase the debt ceiling to be accompanied by a plan to reduce the growth of the country’s debt. The two sides could not agree on how to reduce the growth of debt. Republicans wanted to reduce spending as opposed to increasing taxes and democrats wanted to increase taxes and cut spending to lesser degree. The Tea party is pushing for a constitutional amendment requiring a balanced budget.

The U.S. is the only country with an effective debt limit. Denmark technically has a debt limit but it is so high that it is unlikely to ever be reached. If the U.S. is even unable to pay the interest or principle on the debt there would be an international financial crisis of epoch proportions. One big concern is that raising the debt ceiling is no-longer a routine event. As the politics surrounding the debt ceiling intensifies there is the real possibility that congress will not be able to raise the debt ceiling sometime in the future causing a default on the U.S. debt.