What is the Debt Ceiling?

Published by Thomas Herold in Economics, Laws & Regulations

'Debt Ceiling' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Debt Ceiling refers to an American budgetary and financial constraint which the nation self imposed beginning in 1917. Congress mandates this limit for the maximum amount of debt the Federal government may have at any point in time. Back on November 2nd of 2015, the U.S. Congress suspended the debt ceiling with the Bipartisan Budget Act of 2015. The ceiling remained suspended through March 15th of 2017, after the Presidential election. They did this deliberately to allow time for the new President (Trump) and his (Republican) Congress to establish themselves before they have to address the continuous debt crisis of the United States.

The prior debt ceiling was a whopping $18.113 trillion. Because the country was about to surpass this level on March 15th of 2015, then American Treasury Secretary Jacob Lew ordered a suspension to the debt issuance of the U.S. He began engaging in what analysts call “extraordinary measures” in order to stop the debt from breaking through the artificially created limit. To do this, he quit paying Federal government staff as well as the retirement fund contributions for U.S. Post Office employees. He began to sell the investments which these funds held as well.

The debt limit also covers a significant quantity of debt which the Federal government must repay itself. This includes the massive creditor the Social Security Trust Fund. Money owed to everyone outside of the U.S. government they call the American public debt. This amount represents approximately 70 percent of the aggregate Federal debt.

It was actually the Second Liberty Bond Act of 1917 which first saw Congress establish the initial debt ceiling. This law permitted the U.S. Treasury Department to sell Liberty bonds in order to pay for the then-vast costs of the U.S. military involvement in the First World War. By such an action, Congress gained the upper hand in overseeing total government spending for the first moment in U.S. history. Up to this point, the Congress had only held authority to approve particular debts, such as short term notes or for the Panama Canal.

By 1974, Congress found a way to gain absolute control over the budget process and effective spending in the United States. They called this new law the Budget Control Act of 1974. This new procedure for the budget envisioned Congress working closely in concert with the U.S. President to agree on what amount of money the country’s government will actually spend. This all made the debt ceiling need irrelevant, since all it does is permit the Federal government to borrow necessary funds to pay for spending it previously approved anyway.

The reason this debt ceiling still matters is because Congress intentionally limits the amount of money which the U.S. Treasury may effectively borrow with it. If they do not continuously raise this artificially imposed limit, then the United States will default on its outstanding debt obligations. In general, the Congress has experienced no remorse for raising it. They raised it around ten times over the last decade, of which four of those times occurred in only 2008 and 2009.

This debt ceiling becomes a crisis in the event that both Congress and the American President are unable to come to an agreement on the country’s fiscal policy. This has happened with alarmingly increasing frequency over the last few decades. It was an issue in 1985, 1995/1996, 2002, 2003, 2011, 2013, and 2015. The ceiling and associated government spending becomes an issue when the debt versus GDP ratio becomes excessively high.

The International Monetary Fund states that the maximum safe level for developed nations is 77 percent. After this point, holders of government debts then feel justifiable concerns that the nation will be unable to create sufficient revenues to repay the total debts.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Debt Ceiling' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.