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US Debt Ceiling

The US Debt Ceiling - what is it?

By Phil Stratigis

There's been a lot of talk recently about raising the US debt ceiling, but not a whole lot of context as to what exactly this means and why it's supposedly such a big deal.

Think of the debt ceiling as a credit card or a line of credit for the United States department of the Treasury. If the Treasury does not have enough cash to pay its bills, it can borrow money to cover its expenses. However, just like a line of credit, there is a limit to how much money can be borrowed - this is what is known as the "debt ceiling."

The limit to the ceiling can be raised through an act of Congress, and in fact has been raised 74 times since 1962.

The problem has recently become the fact that the limit to the debt ceiling ($14.3 trillion at the time of this writing) is lower than will be needed for the government to continue paying its expenses. The estimated day on which the United States will no longer be able to borrow in order to meet its financial obligations is August 2, 2011.

So the big question becomes - what happens if the problem doesn't get solved?

This is where it gets rather tricky. The truth is that nobody is completely sure what will happen. Just like how the stock markets are inherently unpredictable, the US not meeting its obligations will have unpredictable outcomes.

One of the major concerns is that the United States will get a decrease in its debt security ranking. Currently, the ranking of US debt is AAA, which means that according to the expert financial agencies, US debt is among the most secure debt to own (with the highest likelihood of getting paid back with interest).

If the government is unable to pay interest dividends (just like interest fees based on an APR to a credit card agency), the security ranking might get downgraded. But, again, nobody is completely sure what effect, if any, that will practically have.

Ultimately, raising the debt ceiling is only applying a band-aid to a large wound. As much of a quagmire the debt ceiling debate has been, the only real solutions are even more difficult to swallow.

The government needs to eventually either cut spending or raise taxes (or a combination of both). These, of course, are not easy options to swallow for anybody.

It looks like the Treasury could stand to contact RethinkingDebt.