The US is Hitting the Debt Ceiling

 The US is Hitting the Debt Ceiling

What D.C. is talking about.

The debt ceiling. Yesterday, Treasury Secretary Janet Yellen sent a warning to Congress: the United States’ debt ceiling is quickly approaching, and the U.S. could default on its debt as soon as October if action isn’t taken to raise or suspend it.

The what? The debt ceiling is the maximum amount of money the United States can borrow. Our government borrows money when the Treasury Department issues government securities, or treasury bonds, that other countries and institutions buy. That infuses the government with cash, and it means our debt is owned by U.S. institutions, the U.S. public, and other nations.

The debt ceiling was created in 1917 under the Liberty Bond Act as a way to rein in government spending and increase the efficiency of our borrowing. In essence, the goal was to allow the U.S. Treasury to borrow money without Congressional approval and within the bounds of the debt ceiling framework. If the national debt hits the debt ceiling, the Treasury Department is supposed to take “extraordinary” measures to pay off our debt and expenditures until the ceiling is raised again. The larger issue is that if we hit our debt limit or fail to pay interest to the bondholders holding our debt, we could go into default, which would lower our credit rating and increase the cost of the debt. That cycle could set off a global financial crisis and send the economy into ruin. In theory, this creates the incentive to avoid hitting the debt ceiling, and produces a more fiscally responsible government.

Historically speaking, though, the debt ceiling has become a notorious moving target because rather than reining in spending, we opt to raise or suspend the debt limit every time we get close to hitting it. The debt ceiling has been raised 78 times since 1960, including 49 times under Republican presidents and 29 times under Democratic presidents. In August of 2019, it was suspended by former President Donald Trump until July of 2021, which recently passed.

Now, Treasury Secretary Yellen is warning that as the debt ceiling once again approaches, Congress must act. In recent history, these moments have often been used by Congress as leverage against the other party’s administration. In 2011, for example, Republicans pressured former President Barack Obama to reduce the deficit (cut spending) in return for them increasing the debt ceiling. The U.S. Treasury debt actually lost its triple-A rating at that time.

Once again, with the debt ceiling here, Congress is being told it must act. Below, we’ll take a look at some reactions from the left and right, then my take.