Like the (Debt) Ceiling Can’t Hold Us….

They may be the lyrics to a hot pop song this summer, but those words apply just as appropriately to a massive ongoing fight in Congress, as well. Specifically, the debate concerns the debt ceiling, and whether or not it will be raised this fall.

Currently Republicans are digging in their heels and declaring that they will not permit the debt ceiling to be raised unless they can get Democrats to make some concessions on the Affordable Care Act, also known as Obamacare. And as in 2011, they are again asking for deficit reduction and spending cuts.

An aide for House Majority Leader Eric Cantor (R, VA) told The Huffington Post that the debt ceiling debate will possibly be used to influence Democrats regarding postponements or structural changes to the law.

Not raising the debt ceiling amounts to allowing the country to default on its obligations, which the Obama administration refuses to negotiate over.

So Just What is the Debt Ceiling?

First, a quick word of explanation: the debt ceiling is a term that refers to the maximum amount that the United States can borrow. It is a number that is legislated by Congress, and it was implemented in 1917 to limit the amount of money that the Treasury could issue as bonds, in order to put a check on the President’s spending ability.

When it was introduced, the President had a far greater ability to borrow and spend, but since then substantial changes have restricted that ability, so that many economists believe the debt ceiling is no longer even a necessary limit.

Over time, Congress has had to raise the ceiling as spending approaches the limit. This has happened 39 times since 1980. It was raised 18 times under President Ronald Reagan.  Under President George H.W. Bush, it was raised five times; under Clinton, four times; under George W. Bush, seven times; and so far has been raised four times under President Obama.

In 1979, the Gephardt Rule decreed that the debt ceiling would be raised as budgets were approved, thus eliminating the need for a separate decision required to fund what had already been approved to be spent. This rule stood until it was repealed by the Republican Congress in 1995.

Why is the Debt Ceiling Important?

A 2011 Government Accountability Office (GAO) study declared that “the debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.” In other words, the debt ceiling does not affect the amount of money that the federal government spends. It only affects the government’s ability to pay what it has already agreed to spend.

It’s much like writing a check in your checking account. You’ve already spent the money; whether or not you have the money in your checking account, you are obligated to pay it. The debt ceiling is like an empty checkbook: the government is now writing checks that can’t be cashed.

And, unlike bouncing checks in your own personal checking account, a “bounced check” from the U.S. Government can have vast, pervasive, worldwide repercussions.

In effect, this would be a default of the U.S. Treasury, and would lead to uncertainty in the rest of the world. If the United States cannot pay its obligations, then the U.S. dollar may no longer be considered the “reserve currency” of the world, and the implications of that are truly staggering.

What Happens When the Debt Ceiling is Reached?

The first thing that happens when the debt ceiling is reached is that the U.S. Treasury undertakes what are known as “extraordinary measures.” These tactics include delaying payments on certain obligations, such as funding the retirement plans of federal employees.

If the delaying tactics are unsuccessful and the debt ceiling has still not been raised, the Treasury is forced into more severe actions, such as actual non-payment of certain obligations. The executive branch has the legal authority to decide which obligations will be paid and which will not.

In theory, the interest payments on Treasury bonds and notes would be prioritized, so as not to affect the country’s credit-worthiness and interest rates.

The Debt-Ceiling Crisis of 2011

In 2011, the Republican Congress made its first attempt to tie the raising of the debt ceiling to one of their platform objectives, and tried to stall the increase until satisfactory deficit reduction was achieved.

At that time, however, the Treasury department declared that it could not prioritize payment because all obligations are equal under the law, and thus no payments whatsoever could be made.

The delay caused the stock market to fall over 2,000 points during July and August, and resulted in the first-ever downgrade of the U.S. Government’s credit rating.

The GAO has estimated that the delay increased U.S. borrowing costs by $1.3 billion in 2011 and projected that the increases would continue into the future. The Bipartisan Policy Center predicted that the delay would cost almost $19 billion over ten years.

The Debt-Ceiling Crisis of 2013

The country actually reached the debt ceiling on December 31, 2012, and the Treasury has been undertaking extraordinary measures since January 1st. The American Taxpayer Relief Act of 2013 resolved the “fiscal cliff” issues but did not address the debt ceiling. At that point, the debt ceiling needed to be raised by $700 billion in order to fund the remaining activity of the 2013 fiscal year.

Late in January, Congress passed the No Budget No Pay Act of 2013, which suspended the debt ceiling until May 19, and prevented the extraordinary measures from being depleted by the middle of February.

With the spring suspension over, the Treasury is again in defensive mode, and says that they will be able to survive possibly until October or November before this round of extraordinary measures is exhausted.

So What Now?

Prepare for an ugly battle this fall, with potentially crippling effects, if Congress cannot reach agreement before the Treasury hits the wall.

Entire agencies shut down, essential services eliminated, and financial markets in chaos. The reputation of the country is at stake – do we pay our bills, or don’t we? It’s a simple question, and a simple solution.

Congress has already authorized the spending, so not raising the debt ceiling does not affect the budget or the deficit in any way. It simply keeps the checking account empty when bills are due to be paid.

The Republicans are playing a dangerous game, with the “full faith and credit” of the United States on the line.

Karin Hernandez has been interested in personal finance since she began reading Money magazine in high school. Over the years, she has traded stocks, IPOs, options, futures and forex. She became a freelance financial writer in 2012, and currently writes stock market analysis for The Motley Fool and Seeking Alpha, as well as financial blog posts and articles for numerous private clients. She now totally believes that dividend-growth companies are the best way to invest.

6 Responses to “Like the (Debt) Ceiling Can’t Hold Us….”

  1. Ernie says:

    Excellent article about the debt ceiling, I can’t believe that so many don’t understand this very important concept. I’ll be sure to share this over Facebook and Twitter!

  2. Gage says:

    Sorry but I feel that Congress is just made up of a bunch of people who simply can’t do their jobs. I’ll be sure to remember this when voting next election.

  3. Karin Hernandez says:

    Thanks so much, I’m glad you liked my article. Yes, this is a very misunderstood concept. Most people think that refusing to raise the debt ceiling helps to keep Congress from spending more money. Instead, it’s like Congress is refusing to put money in the checking account after they’ve already written the checks.

  4. efpierce says:

    That has got to be the best explanation about the debt ceiling that I have ever heard! You hear about it so much on the news and everyone is so scared of what might happen if it gets raised. To know what it is and that is has been raised many times before, makes it less scary and by understanding it, maybe we can all help eliminate the need for it by restricting how the government spends our tax dollars.

  5. Chris Romans says:

    I don’t feel like the “debt ceiling” is particularly useful. Maybe because I like my concept of finances to be very streamlined. Only spend what you have (or maybe have a SMALL line of credit that you are able to pay off) and make sure you pay back the debts you have accrued. When considering the nation’s finances, we should really consider and reconsider our foreign actions and monetary aid. I feel like so much debt could be erased in the United States simply by cutting off some undesirable countries from our money flow. Sadly, this is difficult because money tends to speak louder than words.

    At the end of the day though, I found this article to be very beneficial. I never quite understood the debt ceiling, but you explained it so plainly. Thanks much for that!

  6. Karin Hernandez says:

    Thank you so much!!!!! I really try hard in my writing to clarify difficult ideas so that people will be able to better understand the issues in our country. I am so gratified to hear that my writing is helpful.

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