What is the debt ceiling? Yahoo U explains. – Yahoo Finance

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For the federal government, raise the roof is anything but fun it means things could spiral into disaster.

It all concerns a legislative feature that has existed in American politics for over 100 years: the debt ceiling.

As a mechanism to enforce prudence over government spending, Congress establishes a statutory limit on the amount of money that the federal government owes.

When the government breaches that limit, the U.S. Treasury cannot raise more cash. Failure to pay the bills could then lead to default.

For the worlds largest economy, defaulting on the debt would not only be a domestic crisis, but a global one. During the 2021 debt ceiling debacle, Treasury Secretary Janet Yellen said a failure to raise the debt ceiling would trigger widespread economic catastrophe.

The debt ceiling was first enacted in 1917 and establishes an aggregate limit on the amount that the U.S. government is allowed to borrow.

The debt ceiling is not the same as a budget resolution; it does not determine the volume of government spending or the nature of government spending.

For example, a Congress that has already appropriated money (for example, to defense spending or Social Security) will still need the U.S. Treasury to raise the funds to finance those projects even if doing so would breach the debt ceiling.

Congress has historically acknowledged the limited upside and catastrophic downside of refusing to raise the debt ceiling. Legislators have commonly voted on a bipartisan basis to raise the debt ceiling when the total debt appears close to the statutory limit.

The U.S. Treasury says that since 1960, Congress has moved 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit.

Congress has had a history of avoiding a breach in the debt ceiling, often times supporting a change in the statutory limit on a bipartisan basis. Source: U.S. Office of Management and Budget, The Washington Post

When the debt exceeds the statutory limit, the U.S. Treasury cannot issue more debt to finance existing obligations.

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For the U.S. government, those obligations often look like payments to bondholders that own Treasury securities (i.e. a 10-year U.S. Treasury). Those bondholders effectively lend to the government on the promise of being paid interest (i.e. coupon payments).

If the Treasury cannot raise more funds, it may not be able to make payments on those bonds. If payments are missed, the credit rating on the U.S. government could fall.

The debt ceiling was first enacted in 1917. Photo taken in Washington, D. C., United States Credit: Getty

As one of the most liquid markets in the world, disruption in the market for U.S. Treasuries would quickly spillover into global markets.

Although it did not lead to a default, a heated debt ceiling debate in 2011 pushed credit rating agency Standard & Poors to downgrade the U.S. from AAA (the safest rating) to AA+. As of 2021, the U.S. still had not been upgraded back to AAA.

The U.S. Treasury has extraordinary measures it can deploy to pay its bills even after a debt ceiling is breached.

For example, the Treasury can suspend daily reinvestment into the thrift savings plans for federal employees or draw down on a reserve known as the Exchange Stabilization Fund.

But those measures can only stave off a default for so long. In 2021, the U.S. breached the debt ceiling on Aug. 1, and estimates were that those extraordinary measures could only bridge the governments bills through October or November.

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What is the debt ceiling? Yahoo U explains. - Yahoo Finance