The Debt Ceiling, Explained—And What Could Happen If It’s Not Raised

Topline

The U.S. debt ceiling (or debt limit) is about to be hit on Thursday unless it’s increased by Congress—and if it’s not, “extraordinary measures” may be needed to ensure the federal government does not default on its financial obligations, and it could wind up impacting Americans almost immediately.

Janet Yellen, Chair of the Federal Reserve, speaks at The Economic Club of New York.

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Key Facts

The debt ceiling, or debt limit, is the total amount of money the federal government is allowed to borrow through the U.S. Treasury in order to pay its existing legal financial obligations.

Some of the financial obligations include Social Security, Medicare benefits, military salaries, tax refunds and interest on the national debt.

The U.S. debt ceiling is $31.3 trillion.

On January 13, U.S. Treasury Secretary Janet Yellen wrote a letter to Congress warning the debt ceiling will be hit on Thursday, and the Treasury will have to take “extraordinary measures” to prevent the U.S. from defaulting on its obligations.

Immediate measures Yellen expects to implement this month would be to redeem existing and suspending new investments to the Civil Service Retirement and Disability Fund (CSRDF) and the Postal Service Retiree Health Benefits Fund (Postal Fund); and also to suspend reinvestment of the Government Securities Investment Fund (G Fund) of Federal Employees Retirement System Thrift Savings Plan.

Just approaching a hit to the debt ceiling has economic consequences, as a 2011 standoff between Republicans and former President Barack Obama led to a plunge of stock prices, spiking mortgage rates and a drop in consumer confidence and small-business optimism, according to a report from the U.S. Treasury.

An actual default on payments could send the economy into a recession.

The Republican-controlled House—which needs to approve raising the debt ceiling—is using it as an opportunity to press for other spending cuts, with House Speaker Kevin McCarthy calling on President Joe Biden and Democrats to negotiate.

So far, President Biden has said that he will not negotiate, and Congress must raise the debt ceiling with no strings attached.

Chief Critic

House Republicans have been demanding deep spending cuts. New House rules, set into effect last week, include getting rid of Gephardt rule, which previously allowed the House to evade a vote on raising the debt limit as there would be an automatic increase to the federal government’s borrowing power. With increases no longer automatic, Republicans can negotiate terms in order to increase the debt limit.

Crucial Quote

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” wrote Yellen.

Key Background

In 2011, former President Obama found himself in a standoff with congressional Republicans over the debt ceiling. While finally reaching a deal, just being close to the edge of hitting the debt limit sent stock prices plunging and sent markets in a volatile state. It was also the first time the credit rating agency S&P downgraded America’s credit rating. Other market impacts included spikes in mortgage rates, and investors were less willing to loan to non-financial corporations leading to higher costs of borrowing, reported the U.S. Treasury.