The U.S. government reached the so-called “debt ceiling” on Thursday—a development that could impact your finances and the broader U.S. economy.
What exactly is the debt ceiling? Politicians and economists throw around a lot of confounding jargon about the topic that’s rarely heard in day-to-day life—terminology that can camouflage the gist of the debate, which centers on how much the government should be spending, and in turn, borrowing.
Here’s the meaning of some key terms used in this critical discussion.
Debt Ceiling
The debt ceiling, or debt limit, is the amount of money the Treasury is allowed to borrow (per Congress) to pay for spending the government has already committed to—including Social Security and Medicare payments, military salaries, interest on the national debt, and a multitude of other expenses.
Because the government spends more money than it takes in—which has been true since 2002—it can’t pay its bills in full unless it borrows money to do so. The government has now borrowed nearly all $31.4 trillion that it’s allowed to under the debt limit Congress passed in 2021 (the last time the debt ceiling was reached). Lacking the ability to borrow more money, the Treasury Department is now using a series of accounting tricks to continue to keep paying the government’s obligations.
The law creating the debt ceiling was passed in 1917, replacing earlier restrictions on specific types of debt. Since 1978, the limit has been raised or suspended 61 times, or every nine months on average.
Now that the debt ceiling has been reached, the Treasury will likely be able to continue financing the government’s operations through early June, Treasury Secretary Janet Yellen wrote in a letter to Congress last week.
Congress has the ability to raise the debt ceiling and end the crisis, but Republican lawmakers, who control the House of Representatives, have said they won’t do so unless Democrats, who control the Senate, agree to budget cuts—a proposal that Democrats including President Joe Biden have so far rejected.
Default
Default is when a borrower fails to pay its creditors. In this case, the borrower is the U.S. government and the creditors are mostly people who hold the national debt in the form of Treasury bonds and other securities. Because the debt limit has been reached, if the Treasury were to exhaust the time-buying maneuvers at its disposal, it would have some hard choices to make. With money steadily coming in from taxes, it could pay some expenses but not others.
Here’s another way to think of it. While the day-to-day functioning of federal agencies can continue running through Feb. 18 because of the funding bill Biden just signed, whether the money is there to pay for those operations, or anything else the government does, depends on whether Congress raises or suspends the debt limit. If it doesn’t, the government could run into serious financial trouble—even to the point of defaulting on its obligations.
Some economists believe the Treasury would prioritize paying interest on the national debt first, and everything else a little at a time, in order to minimize the damage to the financial system that could come from a default. For instance, Social Security recipients might receive their payments late, or maybe not at all.
The government would be impaired in performing its basic functions, the dollar would lose value, stocks would fall, and it could take decades for the U.S. economy to fully recover from a default, White House economics advisors warned. No one knows for sure exactly what would happen, since it’s never occurred in the modern history of the U.S. The aftermath of defaults by countries such as Argentina, Greece, and Russia over the past several decades, however, suggests that the experience is better avoided.
The economy can suffer even if a default is averted at the last minute. For instance, a prolonged debt ceiling standoff in 2011 sent stocks and measures of consumer confidence plummeting and contributed to “long-lasting scars on financial markets,” according to a 2013 report by the Treasury Department. Household consumption fell by $2.4 trillion from the second to the third quarter of 2011, when the standoff was underway.
A shock to the financial system could be especially destabilizing at the current time, given that the economy is already facing the possibility of a recession in the near future.
Extraordinary Measures
The Treasury Department can keep the government running for a few months without borrowing more money using so-called “extraordinary measures.” Yellen is not paying into pension funds for federal employees or postal workers and is suspending payments on certain other funds. She then plans on catching up on the impacted funds’ payments once the debt ceiling is lifted.
Full Faith and Credit
“Full faith and credit” is an antiquated-sounding phrase that often comes up during debt ceiling debates.
“We’re able to borrow because we always pay our debt,” President Joe Biden said in a speech urging Congress to resolve the earlier standoff, back in October. “We always pay what we owe. We’ve never failed. That’s America. That’s who we are. That’s what’s called for. It’s called ‘full faith and credit of the United States.’ It’s rock solid. It’s the best in the world.”
The phrase, which is borrowed from the U.S. Constitution, refers to the belief that the U.S. government can always pay its debts using its power of taxation.
Filibuster
During a previous round of the debt limit crisis earlier in the year, Democrats accused Republicans of holding up the increase to the debt ceiling, which may seem an odd thing to say considering the Democrats control all the levers of power needed to enact laws: the House of Representatives, the Senate, and the presidency.
Despite being in the minority, however, Republicans still have the power to obstruct legislation in the Senate thanks to the filibuster rule, which gives senators the ability to block bills they don’t like. A filibuster requires 60 votes to overcome, and the Democrats only have 50 (with Democratic Vice President Kamala Harris waiting in the wings as a tiebreaker, or 51st vote). A process called budget reconciliation can get around the filibuster.
Trillion-Dollar Coin
Ever since 2011, some debt ceiling opponents have proposed a way to bypass the debt ceiling completely: the Treasury could mint platinum coins with extremely high denominations, creating money out of thin air. Yellen dismissed this idea as a “gimmick” in 2021 and said she wouldn’t do it.
This story was originally published on Oct. 7, 2021, and is updated periodically to reflect changes in the U.S. debt situation.
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