It’s time again for one of Washington’s favorite manufactured crises.
The U.S. surpassed the current debt ceiling in March and is now using what are called “extraordinary measures” to keep the government paying its bills. But that can’t go on forever. Senate Majority Mitch McConnell says he wants a vote on the debt ceiling to happen before the Senate goes on its August recess, but other key items on Congress’ list — health care, tax overhaul — remain untackled, and the window to get them done is closing.
No one is quite sure how bad the economic effects of hitting the debt ceiling could be, but they’re potentially catastrophic enough that every time this fight comes up, it’s a big deal. Here’s what you might not know about the debt limit (or might have forgotten about it since we last talked about this as a nation in 2015):
1) What is the debt ceiling?
That’s money the U.S. government owes to people who have bought its bonds and other debt instruments. Much of that debt is held by U.S. firms or by American citizens, although in recent years more and more has been held by foreign governments and citizens — especially China.
Around $5.5 trillion of that debt is what’s called “intragovernmental holdings.” This includes government funds like the Social Security Trust Fund and different government retirement funds (as well as many others) — those funds buy U.S. debt, meaning they are lending money to the rest of the government. Because this is money that one part of government owes to another, some argue that this debt shouldn’t be counted when we discuss the national debt. All the rest of the debt that is not intragovernmental holdings is known as debt held by the public, and that debt totals around $14.4 trillion (or around 75 percent of GDP).
It’s perfectly legal for the federal government to borrow money at these levels, so long as it doesn’t exceed the debt ceiling set by Congress. But if it hits that limit, the Treasury runs short of money. And that means it can’t meet the payroll, or pay for government purchases, or borrow more money.
2) Why on earth did the U.S. put that in place?
The ceiling was first imposed by law exactly 100 years ago, the year we entered World War I. At the time, it was meant to mollify fiscal hawks and isolationists who either opposed the U.S. entering the First World War or didn’t want to borrow too much to pay for it. It didn’t quite look the way it does today, in that there were in fact multiple debt limits for different types of government debt. It was revised in 1939 on the eve of World War II to combine those separate debt limits into one, and it’s been with us ever since — with Congress voting to make the limit higher every time we come close to hitting it.
3) How high is the debt ceiling?
Right now it’s at $19.8 trillion, a new limit established on March 16, and in fact, it’s slightly lower than the nation’s total debt level.
That’s because Congress had, in a 2015 budget agreement, suspended the debt ceiling through March 15, 2017. The idea was that on March 16, the debt ceiling would be reset to reflect any debt the government had accrued while the ceiling was suspended. That means that on March 16, the government immediately hit the debt ceiling, and the Treasury had to start shifting funds around to continue paying bills. (More on this in Question 5, below.)
Simply looking at straight dollar amounts doesn’t give enough context, thanks to inflation and a growing economy. So here’s what the national debt — facilitated by constant debt limit hikes — looks like as a share of GDP.
4) So if Congress refuses to raise the debt ceiling, is it curbing spending?
No. Not raising the debt ceiling is more like not paying your credit card bill. (With the disclaimer here that comparing the government’s finances to one’s personal finances quickly can turn misleading.)
“Effectively the debt ceiling is not specifically a limitation on our spending. It’s just a limitation on the amount of outstanding debt we have,” said Shai Akabas, director of fiscal policy at the Bipartisan Policy Center.
What it means is that the government won’t borrow more to pay its bills — but it will still have those bills. This is money that is set to be spent anyway — paychecks, benefit checks, outlays to contractors. Those obligations don’t go away if Congress doesn’t raise the debt ceiling.
5) What’s the current status?
After the U.S. hit the debt ceiling in March, Treasury Secretary Steven Mnuchin wrote a letter to House Speaker Paul Ryan, letting the speaker know that Mnuchin would be undertaking “extraordinary measures” to make sure that the U.S. could continue paying its bills.
Those extraordinary measures involve using different government funds — like a fund that government employees can invest in as part of a Thrift Savings Plan — to give the Treasury a bit more breathing room for selling more debt. (The Bipartisan Policy Center goes into much greater detail here for those who want the details of exactly how this works.)
But there’s only so far those measures can go. The Congressional Budget Office estimates that “the Treasury will most likely run out of cash in early to mid-October.”
So there are three months to go, but Senate Majority Leader Mitch McConnell has said he’d like a vote on the debt ceiling before the August recess, set to start in mid-August. Though both houses of Congress and the White House are GOP-controlled, getting a debt limit increase could still involve some intraparty friction.
There has been disagreement even within the Trump administration. Mnuchin, for example, earlier this year asked for a “clean,” no-strings-attached debt ceiling increase, but Budget Director Mick Mulvaney has favored attaching some kind of spending overhaul plan to the increase. (In June, Trump said he would side with Mnuchin.)
Like Mulvaney, the ultraconservative Freedom Caucus wants spending changes attached to the debt limit hike. The group of lawmakers isn’t likely to get that, though, because the Senate will need at least eight Democrats to pass a debt ceiling hike, as Politico pointed out this week.
6) Are there any moderately funny rap videos about the debt ceiling?
Oh, you bet.
This one, from libertarian magazine Reason (meaning it’s from a fiscally conservative point of view), is a little dated — it’s from 2011, when the debt ceiling crisis came amid a sluggish U.S. economy (not to mention the European Union crisis), and the Fed was “printing money” to try to drive growth.
That said, we can’t resist a clever quantitative easing joke (“I got a monetary plan, and it involves a lot of toner”).
7) What would it look like if the government hit its borrowing limit?
No one quite knows.
“This is really unique and unprecedented in the sense that we can’t know what exactly would transpire if the government went down the path of not having the capacity to pay its bills,” said Shai Akabas, director of fiscal policy at the Bipartisan Policy Center.
One clear issue is that if the U.S. could no longer borrow, the government could have to stop paying lots of money to lots of people. Some money would still be coming in, but not enough to cover all the government’s bills. That would mean the Treasury would have to decide which to pay on time and which to delay. Federal Reserve transcripts released earlier this year showed that in 2011, the Treasury and the Fed had been planning for this kind of a prioritization.
Cutting back on that government money flowing through federal paychecks and contractors and benefits payments could also easily slow down the economy.
Another key fear is that it would lower confidence in U.S. debt. The U.S. got a taste of that as the country inched toward its borrowing limit in 2011 and suffered its first credit downgrade ever as a result, when Standard & Poors lowered the country’s AAA rating — the highest possible — to AA+.
The 2011 debt ceiling crisis gives some insight into how rattled financial markets could get in the short term. That year, as the Government Accountability Office later explained, the debt ceiling fight spooked investors, pushing up the government’s borrowing costs by $1.3 billion.
And it was just a small taste of what very well could happen if the U.S. were to default. If people lose faith in U.S. debt, they will pull out of securities markets, pushing yields up on those investments. And that can push interest rates up on other investments, like mortgages. Enough of that could slow down the economy considerably.
8) Why is “rattled” always the way people describe uncertain markets?
That’s an outstanding question.
9) Debt ceiling fights just keep happening. Aren’t markets kind of over this by now?
“Yes. You mention it and you get eye rolls,” said Guy LeBas, chief fixed income strategist at Janney Capital Management.
So while defaulting could be an economic catastrophe, investors feel OK for now, especially with one party in charge of both the White House and Congress.
“Everybody in control of the purse strings and signing off on the purse strings is of the same political persuasion,” he said. “So that eases fears a bit.”