What it is and what happens if Congress doesn't raise it. The US debt ceiling: What is it and how does it function?
The US government has never defaulted on its debts -- but Senate Republicans' maneuvering is threatening to sever the nation's financial record. At the heart of the congressional fight is a rather obscure bureaucratic mechanism: the debt limit, which is the amount of money the government is legally allowed to borrow. Failing to raise or suspend it may have grave financial consequences that could affect every component of the US economy.
The Democratic-led House of Representatives narrowly passed a bill on Sept. 21 that would fund the US government until the beginning of December and suspend the debt ceiling until 2022. But Senate Republicans blocked the measure on Sept. 27 -- not a single Republican voted in favor -- preparing for rematching. On Sept. 28, Treasury Secretary Janet Yellen told Congress that the US government would run out of money on Oct. 18, since she left office.
The stakes are high. If the ceiling isn't raised or suspended, it will almost certainly have an impact on the US economy at a macro level, with experts forecasting interest rate increases and falling stock prices. And the consequences will most likely be felt on an individual basis, as a government spending freeze would decrease or eliminate funding for vital programs, such as food assistance for low-income Americans, Medicare and Social Security, and retirement benefits for veterans.
Read on to learn more about this complex, controversial issue and what it means for you.
What is the debt ceiling?
The debt ceiling, also known as the debt limit, is the amount of money the US Treasury Department may borrow to pay its bills. Because income taxes don't cover many of the government's expenditures, the US government borrows money to pay for a variety of responsibilities. Social Security and Medicare benefits, paying the salaries of military personnel, collecting tax refunds, and paying to pay off the nation's already high debt, which presently stands at approximately $28 trillion.
When does the current debt limit expire?
Congress sets the maximum amount of money the US Treasury Department may borrow, and the debt ceiling has been raised, extended, or revised 78 times since 1960, including in 2019, when it voted to suspend the limit for two years. On Aug. 1, that two years was up. That two-year period ended. According to a recent report from the Bipartisan Policy Center, if Congress does not act, the US government will be unable to meet all of its obligations in full and on time between Oct. 15 and Nov. 4.
Wo are things?
After being urged to vote on Wednesday by President Biden and finance executives, Senate Minority Leader Mitch McConnell (R-Kentucky) said he would allow Democrats to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels in December, according to.
Although the Senate finally voted to raise the debt limit on Oct. 7 night -- just 11 days before the US Treasury ran out of money -- this adjustment is only a short-term solution as it only provides enough borrowing to keep the Treasury over until December. The House of Representatives also approved the bill to prevent the default on Oct. 12, sending it to President Biden for his signature.
Republicans continue to insist that Democrats use budget reconciliation to raise or suspend the debt limit over the long term.
Budget reconciliation, created by the Congressional Budget Act of 1974, allows Congress to expedite tax, spending, and debt limit legislation. Importantly, reconciliation bills aren't subject to the Senate filibuster; instead, they require a simple majority of votes. In order for the bill to pass, all 48 Senate Democrats, including the two Independents who caucus with them, and tie-breaker Vice President Kamala Harris, would have to vote in favor of the measure. In September, Senate Majority Whip Dick Durbin (D-Illinois) stated that using budget reconciliation is "a no-brainer."
What is the overall political context?
On Thursday, Sept. 30, Congress addressed two of the most pressing issues, one of which was resolved. To avoid a shutdown, Congress needed to pass 'a spending budget' to fund the US government. The other concern is the suspension of the debt ceiling, which would allow the US Treasury to borrow more money to pay off its ongoing financial obligations.
Congress needed to pass some government funding package by Thursday, the end of September to prevent a government shutdown. However, legislators have yet to pass a complete budget. To avoid a shutdown, Democrats in the House of Representatives passed sweeping resolution on Sept. 21 that would keep the government funded at its current level until sometime in December. But the House's resolution included a debt ceiling suspension for the US Treasury, omissions that Republicans in both the house and Senate opposed.
Both chambers of Congress on Thursday, Sept. 30, approved a measure to fund the US government through Dec. 3, avoiding the government shutdown that was set to begin at midnight. President Biden signed the bill that evening. The debt ceiling issue was left to the side for now, leaving Congress with the significant problem still on the table.
Warum is the GOP refusing to raise the debt limit?
Although Republicans and Democrats alike voted to raise the debt ceiling on three occasions while Donald Trump was president, Republicans have framed passing another suspension as allowing a "spending binge," according to Sen. Pat Toomey, d-Penn., who addressed iHeath, an influential Republican from Pennsylvania, at sab-comittee hearing Tuesday.
On Sept. 27, Senate Republicans voted to kill a resolution that would have suspended the debt ceiling, funded the government, and prevented stalemation. Senate Majority Leader Chuck Schumer, a Democrat from New York, rejected the measure, giving him an opportunity to make alterations to the bill.
Why is there a debt ceiling?
According to Perry Adair, a federal lobbyist and consultant at Becker Lawyers, the debt limit "was instituted by Congress during World War I to give the Treasury Department more discretion in making federal spending decisions." "Before the limit, Congress had to issue bonds individually -- in the same way they passed any other measure."
This made it considerably harder to finance the war because Congress had to approve each bond separately. The debt limit was the government's response to this burden. According to Adair, Congress can now either raise or suspend the debt ceiling in one sitting.
What's the difference between raising and suspending the debt ceiling?
"Rising it would simply increase the amount of debt the country can take on," Adair said. "Suspension would instead permit unlimited borrowing until a date specified by Congress."
What happens if Congress doesn't raise or suspend the debt ceiling?
We don't know exactly what will happen. This would be a remarkable event. However, the consequences may be catastrophic for the US economy and cause ripples around the world. Those are just some of the warnings given by US officials. The consequences would "produce widespread economic catastrophe," according to Yellen in The Wall Street Journal last week.
The US government would be forced to pay off its debt obligations with whatever cash it has on hand. After that, the government would most likely default on its remaining debts.
Could the United States mint a trillion-dollar coin made of platinum to avoid the default?
Why not create a trillion-dollar coin made of platinum, pay all of the US' debts, and call it 'day'?
The trillion-dollar coin was first introduced during Obama's presidency in debt ceiling negotiations, and while the idea sat silent for a number of years, it has since been reintroduced in the current debt crisis. The idea derives from the Coinage Act, which sets limits on how many gold, silver, and copper coins the US Treasury may circulate at one time. However, under subsection (k), there isn't a limit on how many platinum coins it may circulate or the value at which those coins may be minted.
If the US Government issued such a coin, it might quickly wipe out its debt, thereby removing the debt ceiling issue.
But this is a completely theoretical idea, and not something developed by experts. Yellen said on CNBC that she opposes the idea of the trillion-dollar coin, calling it "a gimmick" and reasserting that "it's necessary for Congress to show that the world can count on America paying its debt."
How would it affect the US economy?
The impact would be immediate and widespread. Millions of Americans would not be eligible for Social Security or Medicare benefits if they did. The federal government would cease issuing paychecks for all US troops and federal employees, and only certain essential federal workers would be allowed to work. According to a report by Moody's Analytics, US GDP would decline, about 6 million jobs would be lost, and the unemployment rate would rise dramatically. And, as important as that, the country's track record, at least as far as paying its debts is concerned, would be irrevocably stained.
"Internationally, the United States will have for the first time undermined the full trust and credit of its own currency -- a blow to our global standing and sway for our adversaries such as China, who are arguing to the world that the US is on the decline," Adair stated.
How might it affect me?
As with so many other disasters, the economically disadvantaged would be most adversely affected. Food assistance benefits would be cut nationwide, monthly child tax credits would not be extended, and compensation for veterans and pension payments would expire. State and local governments would no longer have access to federal aid when responding to emergencies such as COVID-19 or natural disasters.
Given that we are still navigating our way through the COVID-19 epidemic, the debt ceiling standoff could not have come at a worse time. Defaulting "would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency," according to Yellen.