On Jan. 19, I read that the U.S. had technically reached the debt ceiling. Considering that most headlines used the word “catastrophe,” I was pretty sure it was serious. However, I wasn’t familiar with the ins and outs of debt limits in the U.S. What went wrong? And what happens now? Even on a basic level, what is a debt limit?
According to the U.S. Department of the Treasury, “The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”
This includes debt held by the public, which is roughly $24.5 trillion, and the government’s debt, roughly $6.9 trillion. The government acquires debt by selling Treasury bonds as well as borrowing from government accounts like Social Security and Medicare.
The first debt ceiling was established in 1917 and set at $11.5 billion. By 1939, it was $45 billion. Since World War II, the debt ceiling has been adjusted over a hundred times. So, why is it in the news now?
Currently, the U.S. debt ceiling is set at $31.4 trillion. On Jan. 19, it hit the limit. The government must borrow money whenever tax revenue doesn’t cover their expenditures, like defense spending, social programs, and salaries.
In response, the Treasury has cited “extraordinary measures,” which will do the trick until about June. So, why not just raise the debt ceiling? During the Obama administration, there was debate as to whether or not the President had the power to raise the debt ceiling himself.
Normally, Congress must agree to have the debt ceiling raised. With a divided Congress, however, many worry whether or not lawmakers will be able to reach a compromise. Speaker of the House Kevin McCarthy wants President Biden to agree to spending cuts before the debt ceiling is lifted. Biden, on the other hand, wants the debt ceiling lifted before any discussions.
If the debt ceiling isn’t raised, the U.S. will default on its debt, meaning that all incoming cash will be used to pay off debt rather than government-funded programs. Although more than half of the world’s governments have defaulted on their debt limit, the United States never has. Treasury securities, regarded as reliable investments, would waver and investors would raise the interest rates on them. These interest rate raises would also transfer to mortgages, car loans, and credit card debt. The stock market would crash and retirement savings would be in jeopardy. Social Security and Medicare recipients would also suffer. In short, a U.S. debt default would trigger a recession. However, let’s not get ahead of ourselves. Until June, all we can do is hope that the Biden vs. McCarthy deadlock resolves and that we can avoid economic catastrophe.
~ Madison Keezer `26