Debt Ceiling
The debt ceiling, or maximum debt limit, is the amount of money that the Treasury Department is allowed to borrow (under Congress) to pay expenses that the government has already committed to, including Social Security payments, Medicare, military salaries, interest on the national debt, and many other expenses. Since the government spends more money than it receives – which has been happening since 2002 – it cannot fully pay its bills unless it borrows money to do so. The government has now borrowed nearly $31.4 trillion from the limit allowed under the debt ceiling set by Congress in 2021 (the last time the debt ceiling was reached). Because it cannot borrow more money, the Treasury is now employing a series of accounting tricks to continue meeting the government’s obligations.
Default
Default occurs when a borrower fails to repay their debts to creditors. In this case, the borrower is the U.S. government and the creditors are primarily those who hold the national debt in the form of Treasury bonds and other securities. Since the debt ceiling has been reached, if the Treasury exhausts the time-based tricks available to it, it will have to make some tough choices. With tax revenue continuing to flow, it can pay some expenses but not all. Here’s another way to think about it. While the day-to-day functions of federal agencies can continue to operate until February 18 due to the funding bill just signed by Biden, whether there is money to pay those operations or anything else the government does depends on whether Congress will raise or suspend the debt ceiling. If it does not, the government could face serious financial problems – even reaching a point of default on its obligations. Some economists believe the Treasury will prioritize paying interest on the national debt first, and everything else gradually, in order to minimize the damage that could be done to the financial system as a result of default. For example, Social Security beneficiaries may receive their payments long after they are due, or perhaps not at all. The government will struggle to perform its core functions, the dollar will lose value, stocks may decline, and it could take the U.S. economy decades to fully recover from default, White House economic advisors have warned. No one knows exactly what will happen, as this has not occurred in modern U.S. history. However, the consequences faced by countries that have defaulted on their debts like Argentina, Greece, and Russia over the past several decades suggest that it is best to avoid this experience.
Extraordinary Measures
The Treasury can continue to run the government for a few months without borrowing more money by using what are called “extraordinary measures.” This involves not paying Yellen into retirement funds for federal employees or postal workers and suspending payments on some other funds. It then plans to make up for the affected payments once the debt ceiling is raised.
Full Faith and Credit
“Full faith and credit” is a phrase that sounds old-fashioned and often comes up during discussions of the debt ceiling. “We are able to borrow because we always pay our debts,” President Joe Biden said in a speech urging Congress to resolve the previous situation, in October. “We always pay what we owe. We have never failed. That is America. That is who we are. That is what is called ‘full faith and credit of the United States.’ It is rock-solid. It is the best in the world.” The phrase, which is quoted from the U.S. Constitution, refers to the belief that the U.S. government can always repay its debts using its taxing authority.
Disruption
Lawmakers
During an earlier round of the debt ceiling crisis earlier this year, Democrats accused Republicans of obstructing an increase in the debt ceiling, which might seem odd to say considering that Democrats control all the levers of power necessary to enact laws: the House, the Senate, and the presidency. Even though they are in the minority, Republicans still have the ability to obstruct legislation in the Senate thanks to the filibuster rule, which grants senators the power to prevent bills they dislike from moving forward. Overcoming a filibuster requires 60 votes, and the Democrats only have 50 votes (with Democratic Vice President Kamala Harris standing by as the tie-breaking vote, or the 51st vote). The budget reconciliation process can bypass the filibuster.
Trillion-Dollar Coin
Since 2011, some opponents of the debt ceiling have suggested a way to bypass it entirely: the Treasury could mint high-denomination platinum coins, effectively creating money out of thin air. Yellen dismissed this idea as a “gimmick” in 2021 and stated that she would not do it.
This story was originally published on October 7, 2021, and is updated periodically to reflect changes in the state of U.S. debt.
Do you have a question or a comment or a story you’d like to share? You can contact Deacon at the email dhyatt@thebalance.com.
Source: https://www.thebalancemoney.com/debt-ceiling-dictionary-your-guide-to-the-jargon-5205009
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