The Debt Ceiling Made Easy: What it is and Why it’s Important

With all the talk these days about the debt ceiling and the fight to raise it, a lot of people are left wondering: what exactly is the debt ceiling? For the majority of Americans, this the first time hearing about it being a major issue, and I hope to explain it a little more for you in a simple quick and easy fashion.

What is the debt ceiling? It is the amount of money set by Congress on the amount of debt the government can borrow. This cap includes debts owed to the public and programs such as Social Security and  Medicare. The first limit was set in 1917 and has been raised many times since then, including being raised 10 times since 2001 alone. The amount the debt ceiling is currently set at is $14.294 trillion.

Why is August 2nd important? While we officially hit our debt ceiling on May 16th, August 2nd will be, according to the Treasury, when the  United States will no longer be able to pay our bills in full. The reason why there is a push to get it done ASAP and to not let it get close to the deadline is because once/if President Obama and leaders from both sides reach an agreement, it will still take more time to get it done. The leaders of each party will then have to present the agreement to their parties and both sides will need to agree on it. Then the House and Congress will have to vote and pass the debt ceiling increase so that the President can sign it and make it official. All of this takes time, so the sooner, the better, as to not risk going past the deadline.

What happens if the debt ceiling isn’t raised by the August 2nd deadline? Here is where it gets a little tricky, because truth is – no one knows for sure what exactly all will happen. If we say, as a country, that we can’t meet our debts and default on some of the money we owe, it could cripple the economy and send other markets across the world down with it -but no one knows to what magnitude. The stock markets will take a hit, 401k and pension plans will suffer. Credit and loans could be nearly impossible to get and interest and credit rates would skyrocket dramatically. It could also cause more unemployment among other things. The rest of the world, including China and Europe would not only be very upset with the United States, but once we would start to repay our debt, lending to America would be hard and when lending returns it would be much at a higher rate, basically America COULD be labeled as essentially a deadbeat country.

My bottom line: Default is NOT an option. The debt ceiling has ALWAYS been raised under every other president before Obama and it has to, in all actuality, be raised again. It could just be a small increase so the debate comes up again soon,President Obama has said he wants the largest deal possible. So the other option is that it will be a bigger increase, which means that, for the most part, politicians won’t really have to revisit the issue of the debt ceiling again for awhile.

While I also don’t think anyone can deny the United States needs to address our debt, solving a generational problem, which is what it is, it cannot be done quickly overnight. It takes time. We should raise the debt ceiling as we have always done and will continue to do, and then start discussing how as a country we can decrease our debt. The discussion on how to do it, whether it be spending cuts, tax increases, or a combo of both can be debated in the future. For now, in my opinion, we HAVE to raise the debt ceiling and soon, because the consequences of not doing it could be catastrophic not only to our country but the world.

Posted by:

Justin Burkhardt