The debt ceiling is a term that has been used quite a bit lately, but most people don’t even know what it means. Well to those of you who don’t, do not sweat it – we will break it down here.
The debt ceiling is defined as the legal limit of money that the federal government is allowed to borrow. Currently, the debt ceiling is set at $16.7 trillion. In other words, the federal government can only borrow up to that amount.
Think about it like a credit card. When you have a credit card, you have a credit limit, which is the limit on the amount of money you can borrow. The debt ceiling is similar to one’s credit limit. The federal government cannot spend more than their limit.
If the federal government exceeds the $16.7 trillion limit, Congress will not have the money to pay for things such as bills. If the United States runs out of money to pay for its expenses, then the United States will default on its debt obligations.
According to The New York Times, Washington has always spent more money than it has, because Washington has always intended on making up the difference through borrowed money.
So what’s the big deal? Why does this all matter?
The debt ceiling is important for many reasons. As a country, we want to be able to pay back our debt. If we can’t pay back our debt, it shows that the United States is not financially stable and ultimately, as a country we are unreliable.
Moreover, the federal government has already approved to pay for things. Such things would include budget bills, social security checks for retirees, as well as payments due to private companies, which include federal contracts and interest on bonds.
If the debt ceiling were reached, the federal government would not be able to pay for things that have already been approved in the budget. For example, retirees could stop receiving their social security checks, and private companies may not be given their interest on bonds, etc.
Consumers would also feel it too. Interest rates on things such as credit cards, mortgages and loans could increase significantly. This could potentially slow the economy because people would have to stop spending money in other areas in order to compensate for the increased interest rates.
A default could also provoke people to sell-off their stocks and treasury bonds, according to Wall Street analysts.
In short, reaching the debt ceiling and thus defaulting would instill fear and panic in the American people.
So what do we do
Well, we hope that the government can come together like adults and speak about the debt ceiling and how they intend to increase it. The debt ceiling can be increased, as it has been plenty of times before; 78 times to be exact.
However, because the government has shutdown, democrats and republicans have not come to an agreement about the debt ceiling, which is concerning because time is definitely ticking.
Think you understood the debt ceiling and all that it entails? Take this quiz from the L.A. Times to find out.
