Debt Ceiling 101

by Elaine Schwartz    •    Jul 15, 2011    •    642 Views

During the month of August, if the U.S. hits its debt ceiling of $14.3 trillion and the Congress says, “No, you cannot borrow anymore,” then what will happen?

During August, the U.S. will have $172B (billion) in federal revenues and $307B in authorized spending. If it cannot borrow more money, it will have a shortfall.

Specifically, each day, the U.S. Treasury has a certain amount of cash on hand. On August 1, the cash on hand at the U.S. Treasury will total $73.8B. 2 days later, when it will need to send out $23B for Social Security, it will have enough. The next day when Medicare and Medicaid payments are due, and on August 5, when it owes federal salaries totaling $3.4B, it should have enough.

But not for long. This video and these articles provide all of the specifics. And this Washington Post interactive exercise let you decide what to do.

The bottom line? During August, we could cover Social Security, Medicare, Medicaid, paying the troops, paying interest on the debt. But what about food stamps? Defense vendors? IRS refunds? You can see the whole list here. Unless we can borrow some more, unless the debt ceiling is raised, we, or actually, the Treasury, will have to make some choices about what to pay and what not to pay.

An interesting fact: During the 1996 budget crisis, Treasury Secretary Robert Rubin told the Congress that Social Security recipients would not receive their March payments. The Congress immediately passed a law exempting Social Security from the debt limit.

The Economic Lesson

In 1917, Congress decided it could not keep track of every U.S. loan. So, to maintain some control over national finance, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to increase how much the U.S. could borrow. Since 1962, the U.S. has raised its debt ceiling 75 times.

How does the U.S. borrow money? The U.S. borrows money by selling securities to other countries, to itself (when Social Security has extra money, it buys U.S. bonds.), to you, to me, to banks, to businesses, to anyone who wants to buy its bonds. 

You can read more about debt ceiling history here.

An Economic Question: In the Washington Post interactive, which spending did you suspend?


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