What is the debt ceiling? If you’ve been watching the news, then talks about the debt ceiling have been front and center. But what is it exactly, and why is it so important? Here is an overview.
The Debt Ceiling Explained
The Debt Limit is a ceiling imposed by Congress. It is the maximum amount of debt that the government can have outstanding. The last limit was set at $28.4 trillion back on August 1 of 2021.
When the limit is reached the government can no longer take on additional debt and must draw on cash on hand or on incoming revenue to continue funding its obligations.
The government is currently set to hit the debt limit as early as June 1st. If the limit is reached before being raised, then many are predicting a “catastrophe.”
There are several consequences that could occur if the government fails to raise the debt limit. Near term social security benefits and payments to government employees would be delayed. Next, the government would not be able to service its debt or pay interest to bondholders. US debt is sold as bonds and securities to investors, corporations, and other governments. Defaulting would cause the US credit rating to drop, and interest rates to spike.
Defaulting could provoke a sell-off of US debt which could spread to other areas of the economy. Look for federal benefits from programs such as SSI, SNAP, Medicare, and Medicaid to be suspended or delayed.
The stock market could crash as the debt rating of the US is downgraded A run on banks may also ensue as depositors rush to withdraw their money.
Lending instruments would see a spike in rates, so if you have credit card or other variable rate debt expect the interest rate to rise. Applying for a mortgage or auto loan will could also become more difficult, as lenders may require higher credit scores. Lenders may also cut credit limits on credit cards or close out unused accounts.
Mortgage rates could rise as much as 2% points, which would strain an already faltering housing market.
If you are expecting a tax refund, then it may be delayed in the event of a default.
If a default should occur, and the credit rating of the US is in fact downgraded, then encouraging parties to take on US debt could be harder looking forward. This could make future funding more difficult.
Time is Running Out
As the clock ticks closer to June 1st, our leaders are running out of time to secure a deal that will raise the debt limit and avoid a default.
A deal appears to be getting closer, but the two sides are still billions of dollars apart and many issues are still being debated.
Let’s hope our elected officials can work out the details and strike a deal soon.
What is the debt ceiling? Simply put, it is the amount of debt that the government can have outstanding. More than that, it has far reaching implications into every area of the economy.
Writer and Investor. Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.