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Understanding The Debt Ceiling 101

October 12, 2013

I don’t think anybody really understands the debt ceiling or how our country got into this financial mess but my friend Mike has provided us with a pretty good start.  I have reposted his blog, Rat’s Right originally posted on 10/09/13 with excerpts from an article posted on 10/07/13.  I would love to hear your opinions!


1. First of all, what is the debt ceiling, anyway?

The debt ceiling is the maximum amount of money the government can borrow to fulfill its legal budgetary obligations. Those obligations are the mandatory spending requirements Congress has written into law that go unchanged year to year unless Congress acts to amend the law.

2. What impact does the debt ceiling have on overall government spending?

If we hit the debt ceiling, the Treasury won’t be able to borrow money to pay for spending Congress has approved (the mandatory spending, not the discretionary spending, which is delineated in appropriations bills.), essentially defaulting on its legal obligations.

3. How is this related to the government shutdown?

With a government shutdown, the fed still pays on legal obligations. Surpassing the debt ceiling would stop, limit, and/or delay payments on such obligations.

4. So, what was the sequester, again?

Congress needed to agree on a plan to reduce the US Government deficit by $4 trillion, or else a series of arbitrary spending cuts, totaling $85 billion, would take effect across the board in what came to be called the “sequester.”

5. What will happen if the government doesn’t increase the debt ceiling?

The common line is that breaching the debt ceiling would “call into question the full faith and credit” of the US government.”

(Although, does anyone – including China – really believe that the United States would default on its obligations?)

6. How will this affect my job?

“Non-excepted” federal employees do not report to work during a government shutdown. The effect on non-governmental jobs is less clear, but a long-term economic stall or slowdown (caused by a default on debt) could have an impact.

(Does anyone believe either party would not take steps to prevent a true default?)

7. What can I do about it?

To begin with, you can maximize your emergency fund. Cut back on spending and save some money.

8. Since the government is “shut down,” what can be done about the debt ceiling?

If we hit the debt ceiling, the government could prioritize spending, paying for certain things and not others. Or, the government could let the debt ceiling break – similar to defaulting on a loan.

Or, Obama could play the 14th Amendment card and trump the statutory debt ceiling through the provision that says, “the validity of the public debt of the United States…shall not be questioned.”

(Politically, this would not be a wise option for Obama and he knows it.)

9. How much trouble will the government be in if we default?

Standard & Poor’s issues ratings for governments, known as “sovereign ratings.” These are used as indicators of “the future ability and willingness of sovereign governments to service their debt obligations to the nonofficial sector in full and on time.”

(Again, does anyone in the world believe that the United States of American will default on its debt?)

10. So what is Congress doing about it?

Congress failed to pass any appropriations bills this year. Now the government shut down. Congressional Republicans reportedly called for cuts in the budget to diminish the deficit, and Democrats blocked bills to reopen parts of the government.

Regardless of the ultimate outcome of the shutdown battle – and the debt ceiling debate as well – one thing is very clear: This is an ideological battle over which neither side has yet demonstrated a willingness to cry “uncle!” Hopefully, the “right” ideology prevails.

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