5 THINGS TO KNOW ABOUT THE DEBT CEILING

The debt ceiling is something that has been appearing quite frequently and most people don’t even know what it means. Well, to those who don’t, we will break it down for you here.

WHAT DOES THE DEBT CEILING MEAN?

The debt ceiling is the legal limit of money that the federal government is allowed to borrow. At present, the current debt ceiling is $16.7 trillion. In other words, the federal government is not allowed to borrow beyond that amount. It is likened to the margin of national debt. It is a regulation made by the legislative arm of government to check national debt of the U.S.

ESTABLISHMENT

The debt ceiling was first incorporated in 1917 through the Second Liberty Bond Act and at that time it was set at $11.5 billion to enhance borrowing flexibility. 22 years later, in 1939 the congress had to create the first aggregate debt limit that accounted for nearly all governmental debts. It was set at $45 billion which is about 10% above the total debt owed at the time.

THE CURRENT STATE OF THE DEBT CEILING

Since its first enactment, the president and congress have raised the debt limit almost hundred times. The 1980s had a massive increase crossing the trillion margin. The debt limit that rested below the trillion-margin shot up to nearly $3 trillion. Through the end of the millennium, in the 1990s the debt ceiling was raised again, doubling it to about $6 trillion. It went on through 2000s, where it was again doubled to over $12 trillion. The current debt limit is set at $16.39 trillion.

WHAT HAPPENS IF THE DEBT CEILING IS HIT

Once the government hits the debt ceiling and there are no extraordinary measures left available, it is no longer allowed to issue debt and soon, the government will run out of cash-on-hand. This will mean that given annual deficits at that point, income receipts will not be sufficient to pay millions of daily obligations as they come due.

The federal government will have no other choice than to default on many of its obligations. Payments to social services from the allocations sent to the internal revenue will be defaulted. Salaries, especially to the federal civilian and the military; also, to veterans’ benefits and utility bills will all be shunted.

This would have a serious economic implication on the states, creating chaos in global markets both domestic and internationally. Treasuries also will drop as investors would stop or worse, scale back investments. Thus, there would be no investments available to help the situation as it would be termed bad investments for the investors.

IMPROVING THE DEBT CEILING

For the debt ceiling to be increased, it would require a timely and possibly contentious legal action. It is considerate to know that the debt ceiling also measures gross debt, this means that if the budget were balanced, the debt ceiling would still be raised to cater for the amassed surpluses in government trust funds.