In 2013, then-president Barack Obama told a crowd in Missouri, “If Congress doesn’t pass this debt ceiling in the next few weeks, the United States will default on its obligations. That’s never happened in American history. Basically, America becomes a deadbeat.”
How can the most powerful country in the world become a deadbeat?
That’s where the debt ceiling comes in. If Congress doesn’t either suspend the debt ceiling, or raise it, America won’t be able to pay its bills.
The debt ceiling, or debt limit, is how much money the country is allowed to borrow to pay its bills.
Imagine a credit card. A person applies and gets approved. The credit card company sets a limit on that credit card. With the debt ceiling, it’s Congress setting the limit.
A person can keep spending until he or she hits her limit. That’s the debt ceiling. Right now, it’s set at $22 trillion.
Just like a credit card, once you hit your limit, it’s up to the credit card issuer to decide if the limit should be raised.
Like all credit cards, the debt ceiling has some fine print. It doesn’t apply to new spending. It can only be used on items the country has already agreed to pay for, like Medicare, Social Security, tax refunds, and interest on the national debt.
Just like a credit card, if America goes over its credit limit, or in this case, the debt ceiling, its credit takes a beating.
The country spends more money than it takes in, so to offset this, the government borrows money by selling bonds to investors across the globe. However, once the country hits the debt ceiling, the country can only pay its bills through tax revenues.
But there is another option. Congress can vote to suspend the debt ceiling, meaning they can ignore it for a set time. That’s what they’ve done as recently as 2019. With the 2019 vote, Congress suspended the debt ceiling for two years. During that time, America spent another $6.5 trillion, putting the current debt ceiling at $28.5 trillion.
The debt ceiling is always a contentious issue in Congress, with Republicans historically being against raising it and Democrats in favor of raising it.
That’s still true now.
“There’s inflation rising in more than we haven’t seen in more than a decade,” House Minority Speaker Kevin McCarthy (R-Bakersfied) said in late July. “It is a tax on every American. And so when it comes to a debt ceiling they should take it very serious, and think it long and hard, and they ought to stop digging the hole that they are creating for America and change course.”
However, just a month before that, Treasury Secretary Janet Yellen spoke to a Senate Appropriations subcommittee.
”I think defaulting on the national debt should be regarded as unthinkable. Failing to increase the debt limit would have absolutely catastrophic economic consequences,” Yellen said.
“I would plead with Congress simply to protect the full faith and credit of the United States by voting to raise or suspend the debt limit as soon as possible,” she added.
This might sound like a wonky, inside-the-Beltway problem, but the debt ceiling can impact all Americans where it hurts the most: in their wallets.
If the country defaults on its payments, eventually it may not have enough money to make Medicare and Social Security payments.
Not only that, but if the country doesn’t pay its bills, its sovereign credit rating could go down. That’s what happened in 2011, when Congress stalled on raising the debt ceiling.
if the country’s credit rating goes down, investors could demand higher interest rates for Treasury Bonds, which could then impact more Americans.
The good news is that America has never defaulted on its payments.
“Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents,” the Treasury Department says.
However, that doesn’t mean the country will never default on its payments.