What is the Debt ceiling?

If you’ve been watching the news lately there’s a good chance you would have seen stories about something called the US Debt ceiling. For expats living in the US (and elsewhere) this could be a confusing state of affairs. We take a look at some of the things you need to know about the debt ceiling and explain the impacts of it.

What is it?

The debt ceiling is the cap set by the US Congress on how much money the Federal government can have in outstanding debt. It applies to the debts owed to the public (bondholders) and the debts owed to the federal government, including funds for things such as Social security payments and Medical care. The present day debt limit stands at a whopping $16.699 trillion Dollars, and since the 1940’s the debt ceiling has been raised 79 times.

Some may mistake the rising of the debt ceiling as a means for the government to spend more cash, this isn’t true. In fact the debt ceiling simply allows the USA’s treasury to pay off all of the bills and other legally binding payments owed by the United States. The rising of the ceiling is actually just a way for the country to pay what it owes.

In theory the debt limit was intended to be used as a way for Congress to control spending, in reality it doesn’t. The issue is that the debt ceiling does not take into account needed budget rises or legislative decisions that require more funds.

What’s the issue?

Earlier in 2013 the debt ceiling caused tremors in the markets as Congress held out until the last minute to approve the ceilings rise. This time however a deal seems unlikely as the Republican Party tries to get concessions from the ruling Democrat party. Many Republicans are insisting that any increase to the debt ceiling must be tied to spending cuts and other matters including the controversial health law proposed by President Barrack Obama. Countering this however are the Democrats who say that they will not negotiate.

What happens if no agreement is made?

No one knows for certain because it’s never happened. Not since the ceilings inception in 1917 has a government failed to raise the ceiling. Needless to say if no agreement is made it certainly won’t be a good thing for the US and probably the global economy. The main issue would be that the Treasury will not be able to borrow money, a huge problem seeing as the government needs to borrow to make up the difference between its income and what it spends.

Other issues – Budget disagreement

Confusingly another major issue is under debate in the US as politicians are struggling to agree on the government’s budget. If no agreement can be made then potentially the government could be forced to close down. As bad as that will be on the US economy it pales in comparison to the issues that would be caused by a failure to raise the debt ceiling.

A deal on both issues has to be reached by midnight. The uncertainty being caused by these issues has bolstered demand for safe haven currencies such as the Japanese Yen, Swiss Franc and US Dollar.

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