The U.S. Debt Ceiling

There is a lot of uncertainty around what the US Government will do if the US hits the “debt ceiling” in a few days’ time and the ceiling is not raised. So what is the debt ceiling? And how does it affect you and me?

The definition of the debt ceiling is simple. It is simply the maximum amount that the USA can borrow in totality by issuing bonds. So why would there be a need to increase the debt limit? The simplest answer here is that the expenses of the US government have been higher than its revenue through taxes and the like. So the government has to borrow money to finance the payments.

Hitting the debt ceiling basically means that the government failed to pay interest to the bondholders, the country would have “defaulted” and this would lead to the credit rating of the USA falling, thereby increasing the interest rates at which further loans would be given to the US government and citizens. And the economy then proceeds into a vicious cycle. While the goal of employing a debt ceiling/limit would be to hold a country’s finances in check, it also raises the possibility of fiscal irresponsibility since it can be raised (explained below).

This ceiling can be raised and has been raised a number of times since it was created in 1917. It has to be raised to avoid the possibility of the United States, the leading economy of the world, defaulting on its debt. The US defaulting on its debt would send most of the world into a recession according to experts, since most of the world is dependent either directly or indirectly on the US for trade.

So have any other countries tried this type of limit to the economy? Yes.

In Australia, a similar debt limit was introduced in 2007. The goal was to increase fiscal responsibility and keep the budget deficit in check (deficit = revenue - expenses). But after being raised many times through the years, the ceiling was revoked in 2013. Denmark also has a debt ceiling, but the ceiling is much higher than the country’s expenses, so it does not pose a problem, while in Poland, they have simply capped the spending at 60% of their GDP (Gross Domestic Product - the value of the finished domestic goods and services produced within a nation's borders).

We’ll have to see what happens in the US, but that’s it for this article. Read my other articles here.

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