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
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
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
© 2014 Headquarters: RethinkingDebt.org, 1000 University Avenue, Suite 900, Rochester, NY 14607
Consumer Credit Counseling Service of Rochester – 501 (c) (3) Non-profit Credit Counseling Organization, All Rights Reserved.
RethinkingDebt and RethinkingDebt.org are service marks of Consumer Credit Counseling Service of Rochester, Inc.