The definition of the debt ceiling is the limit that Congress imposes on how much debt the federal government can carry at any given time. Once this ceiling is reached, the United States Treasury can no longer issue any Treasury bills, bonds or notes. They can only pay bills as the government receives tax revenues. It is important to understand the way the debt ceiling works because its effect on the national debt can have a direct impact on our way of life. According to surveys, a majority of the public find that a hard ceiling on the debt is a good thing because government debt in general is not favored.
The government’s debt limit here can be compared to your credit card limit; however, the only difference is that Congress controls both its spending and its spending limit. They impose this debt ceiling on the statutory debt limit, which is the outstanding debt in United States Treasury notes after adjustments. Some of these adjustments include unamortized discounts along with old and guaranteed debt.
There are two types of debt in the US. First, there is the debt that the government owes to itself, which includes the Social Security Trust Fund and federal employees’ retirement funds. There is also the debt that is owed to everyone else, which is the public debt, and that takes up seventy percent of the total debt.
The debt ceiling was created by Congress in the Second Liberty Bond Act of 1917 and was used to allow the Treasury Department to issue liberty bonds so that the nation could finance military expenses during World War One. This gave Congress the ability to control overall government spending for the first time because before this was passed it had only issued authorization for specific debt like the Panama Canal and other short-term notes. Then, in 1974, Congress created the budget process which allowed it to control spending which is also why they can raise the debt ceiling.
When both Congress and the President agree as to how much the government will spend, there is no need for the debt ceiling. The debt ceiling only matters when there is a fiscal disagreement.
If the debt ceiling is not raised—and the Treasury is to default on its interest payments—it would cause a few things to happen. First, the government would no longer be able to make monthly payments causing employees to be laid off and preventing pension payments from being disbursed. Furthermore, the yields of Treasury notes sold on the secondary market would rise, creating higher interest rates and slowing down economic growth. Finally, Treasury bond owners would dump their holdings, causing the value of the dollar to plummet. If the value of the dollar decreases, it could bring an end to its status as the world’s reserve currency causing the standard of living here in America to drop.
When looking at the current state of the debt ceiling in America, it’s worth noting that earlier this month, President Trump signed a bill that increased the debt ceiling until December 8 of this year and thus gave the US a brief extension of government spending. This bill also approved $15.25 billion in relief funds for the victims of Hurricane Harvey and Hurricane Irma.