Debt Ceiling: Please Explain

So, as I understand it, the U.S. is as far in debt as we’re allowed to be, and if the debt ceiling is not raised, the country will be in default to its creditors.

But it’s the U.S. government – a.k.a. the debtor – that makes the decision to raise the ceiling.

Can someone please tell me how this makes any sense at all? If I’m about to default on a bank loan, can I raise my debt ceiling so that I can put off paying the bank back, and in fact borrow even more? I didn’t think so. How can a country do it?

Keep in mind this is in GQ, in search of a logical, factual answer, if there is one. Lord knows GD and the pit are appropriate for other aspects of this situation.

As someone who really doesn’t understand anything political, I was under the beleif that it was more like if you were to say “I chose not to owe more then $100,000 to to anyone” But then one day, you’ve bought a house, you’ve borrowed from the bank, you owe on your car and you’re at $100,000. You don’t have any money, but you still need to eat, so at this point you say “Well, how about I change that to $105,000” and you run one of your credit cards up another $5000 or take out a $5000 loan so you can get food, clothes, new laptop etc…
At least that’s my take on it.

We’ve already borrowed money.

We have to borrow more money (incur additional debt) to make payments (principal and interest) on the previous debt.

In your example, it would be like taking out a second mortgage/personal loan to pay back your first mortgage. Or paying your mortgage with a cash advance on your credit card.

You can do that sort of thing for a while, but you are right – eventually the bank will cut you off.

Supposedly, it’s the max we can owe. But, instead of solving our fiscal problems like normal people would, we have a history of just upping our credit limit and leaving the problem for a later time. From another site:

"Fun Facts:
Here’s how many Republican Senators voted to raise the debt ceiling each time it came up for a vote since 1997.

1997: 55
2002: 31
2003: 50
2004: 50
2006: 51
2007: 26
2008: 34
2008: 33

Then Obama was elected.

2009: 2
2009: 1
2010: 0

Another fun fact: The '03 vote was on the SAME day the senate voted for Bush’s $350 billion tax cut."

In response to SmartAlecCatExcept in this case, there are a bunch of ‘banks’ (ie investors) willing to give us more credit, but the government has a self imposed limit on how much debt it will take on. To use Joey’s exam above, the problem isn’t so much “You don’t have any money, but you still need to eat,” but "You don’t have any money and the bank wants it’s mortgage payment’. The goverment already has obligations to pay creditors’ interest, social security payments, soldiers salaries etc, but will not have any money to do so without borrowing more. That’s the default part of it.

Your analogy is backwards. The debt ceiling is really about how much the country is allowing itself to borrow. The bank is being paid and, in fact, not raising the debt ceiling is basically telling the bank that you’ve decided to STOP paying.

So, let’s say you want to buy a car and need a loan from the bank. You’ve already bought the car, but you’ve imposed some artificial restriction on yourself (NOT imposed from the outside) that you are only allowed to have $X in outstanding debt. So, in order to keep yourself under your self-imposed debt ceiling, you cut your food budget, entertainment budget, and probably need to put off your contributions to your 401(k) and maybe hold a garage sale. But none of that is enough.

So, maybe you should allow yourself to be a little more in debt. It’s the decision we all make when buying a house or a car or other big ticket item. How much additional debt is acceptable for us? We do it all the time for our households. Do you say no to the bank loan and wait for the repo man to take your car? Or do you take the loan, get the car, and use it to go to work so you can pay back the bank?

The bank is actually happy to loan you money. In fact, it’s begging to be allowed to loan you money, because you have always made your interest payments, your credit rating could not possibly be higher (in fact, the dictionary has a picture of you under “credit worthy”), and other people use you as THE example of credit worthiness.

I love this, and want to pass it along to some friends. Do you have a cite?

The reason that it makes no sense is that the analogy you are using to try to understand the situation is just not appropriate to how the government runs.

For private debt, like if you want to buy a TV or house or whatever, you go to an institution, ask for a certain amount of credit, and establish a contract with various terms on the interest rate, repayment terms, what happens in case you can’t pay your bills on time, and so on.

But government debt does not work the same way. The Constitution gives the government authority to borrow money on the credit of the United States, and directs that law shall provide for the issuance of debt. In this case, government debt is not like a mortgage or a home loan, where you might suppose that the government would sign an agreement with, say, China on how much money Uncle Sam can get from them.

No, what happens is that the United States prints bonds, T-bills, and other instruments that are sold to anyone who wants to buy them. If I buy a bond, I am giving money to the government in exchange for a promise that my investment will receive a particular rate of interest and will be repaid at some particular date. The government then uses the cash I give them to pay our troops, build roads, pay interest on other debts, and so on – whatever is needed to finance current operations.

If the United States needs to issue more debt, the government has to pass a law which, in effect, says that more bonds will be issued and sold to whomever wants to buy them. If there had to be an analogy to personal finance, it would not be a debtor arbitrarily deciding that his Visa card will have a higher limit; it would be more akin to getting another Visa card so more debt can be acquired.

The important thing to know is that the government is constantly “getting more Visa cards” and also paying off the balances old Visa cards (which is what happens when people redeem bonds), although for so long as we continue to run deficits, we will be acquiring more new Visa cards at a faster rate than we pay off old balances. But again, the law limits how many Visa cards the US can own at one time.

I’m embarrassed by the number of typos in my previous post.

It’s never a good idea to try comparing the government to private households when it comes to budgetary matters. It’s a completely different beast, and you can wind up drawing the wrong conclusions if you use those analogies.

The government borrows as much as investors are willing to lend it at certain interest rates. At the moment those interest rates are very low, because lending to the US is seen as an extremely safe investment. Congress has already passed budgets which say how much the government should borrow, and how much it should spend. But, for some reason, Congress has also instituted a rule whereby it has a certain ‘debt ceiling’ - a total nominal amount of dollars the government is allowed to borrow, even if Congress has already ordered it to borrow more. Raising it used to be a formality: the party in charge and a few others would vote to raise it, while the opposition party would vote against raising it as a protest. That’s why most Republicans voted against raising it in 2009, and it’s why Senator Barack Obama voted against raising it in 2006. It was just for show; there was never any question of the debt ceiling not actually being raised.

What’s unprecedented this year is that Republicans have decided for the first time ever to use the debt ceiling as leverage for actual policy concessions, with the threat being that unless President Obama and the Democrats agree to the Republicans’ demands for spending cuts, they might refuse to raise the debt ceiling altogether, forcing the US into needlessly defaulting even though it can easily borrow more money and keep paying the interest.

It’s entirely a political thing - the US can easily borrow more money if it wants at low interest rates, and in fact Congress (including the Republicans) have already ordered it to do so. The fact that, despite that, Republicans are now using the threat of tanking the US’s credit rating as leverage for winning policy concessions they can’t win democratically is a dangerous precedent, especially if it works and starts becoming a regular thing for both parties.

This has been touched on, especially in Ravenman’s excellent post, but it needs to be directly refuted.

The U.S. will continue to function after August 2. However, the money that will be collected in August will be less than the money we are scheduled to spend in August. I’ve seen the exact numbers, but I’m blanking on them. Something like income of $160 billion and outgo of $320 billion. (Yearly expenditures are less than twice income but because of the April IRS deadline subsequent months collect less tax revenue.)

Congress can choose to spend that $160 billion however it prioritizes. It could choose to pay interest on our bonds etc. as a first cut. That means we would not be in default even technically.

The overall consequences wouldn’t change much, though. Few if any parties would be willing to buy new bonds under these circumstances. Lots of other interests who are scheduled to be paid would complain. Business expansion would crash. All the dire outcomes would fall into place, even though we are not and never were in default.

The debt ceiling is mostly to keep the cash flow of the country permanently on. Cash flow, if you’ve ever run a business, is an art and a necessity that is separate from the year-end balancing of the books. Almost all businesses fall into this problem from time to time, which is why they have lines of credit with banks to tide them over the slow income periods. Cut that line of credit and a healthy business can fold. That’s the debt ceiling.

Why Congress doesn’t raise the debt ceiling by $100 trillion at one time so that they never have to vote on it again in their lifetimes is a different question that I’ve never seen answered. Anybody know this one?

That’s OK, you can just raise your Typo Ceiling.

I’m gonna have to filibuster if he tries that…

The answer is obvious: this would eliminate any utility of even having a debt ceiling. You can debate whether we need one or not, but the simple fact is that it does exist. Raising it to a point that makes it a meaningless concept seems crazy. If you don’t want it, propose eliminating it not gutting it. An amendment that authorized the Treasury to issue debt at its discretion would eliminate the debt ceiling need.

I believe some government person said that for every dollar we spend, we have to borrow 40 cents - so I assume that’s the year-round average.

These explanations are greatly appreciated, but the thing I don’t think I’ve heard explicitly said is; Expenses can be categorized as debt or non-debt. The expectation is that if the debt ceiling isn’t raised, the government will not pay at least some of the debt-expenses ( == a default )

Have I got that right?

No. The U.S. uses debt to finance the deficit it has between revenues and expenses. Debt isn’t a type of expense; debt is a balance sheet item while expenses are an income statement item. Interest on the debt is an expense. No debt is categorized as an expense. They are apples and oranges.

The issue to think about is what is the priority of payments: the flow of funds. Obviously the U.S. takes in revenue and can cover certain of their expenses with it. Who decides what gets paid and what doesn’t when we no longer use debt to finance the deficit. The U.S. likely continues paying interest on its debt, and therefore existing debt obligations do not default. What about social security, veteran benefits, all the other random payments that the governement makes on an ongoing basis. There will not be enough for all of it. They will decide on a flow of funds if it ultimately comes down to a failure to pass an increase in the debt ceiling.

Is the debt ceiling automatically increased with the inflation rate? It’d be interesting to see, historically, how much beyond yearly inflation the ceiling has been raised.

(As a side question, is there somewhere that has a list of the various familiar financial ratios we use to evaluate businesses, as applied to the U.S.?)

When is the last time they had a deadline to raise it and didn’t? And what happened? I am hearing all sorts of doomsday scenarios on the local news.

The problem, as I understand that, is that it’s not Congress making that decision. It’s mostly the executive branch - the Obama administration. Congress passes the laws appropriating the funds, but it’s usually the executive branch that actually uses them in accordance with the law.

So Congress has ordered the government to spend money on certain specific things. It’s also ordered the government to bring in less money than that in revenue. But if it doesn’t raise the debt ceiling, it’s also forbidding the government from borrowing money to cover the gap. So either way, the executive branch is screwed - if it makes all the payments Congress has told it to make, it’ll violate Congress’s orders by busting through the debt ceiling. But if it selectively neglects to make any of the payments Congress has told it to, it’ll violate Congress’s orders to make those payments.

This is why the concept of a debt ceiling itself is fairly absurd. It serves no purpose other than either allowing the minority party to make a protest by voting against it or, for the first time this year, for the minority party to hold the full faith and credit of the country as a hostage in exchange for policy concessions it doesn’t think it can win otherwise.