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What the U.S. Debt Ceiling Limit Means for Your Finances

What the U.S. Debt Ceiling Limit Means for Your Finances

By  Brian Martucci  January 23, 2023

The U.S. government is in danger of intentionally defaulting on its debt obligations for the first time in its history.

The Biden Administration and the House of Representatives, which is controlled by Republicans and led by Speaker Kevin McCarthy, must agree to raise the country’s legal borrowing limit — known as the debt limit or debt ceiling — by early June 2023. If they don’t, the government won’t be able to fund its operations, and financial markets will absolutely freak out. That, in turn, could have far-reaching (and very bad) consequences for your personal finances.

What Is the Debt Limit?

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First, a quick review of what the debt limit is and the situation we find ourselves in today.

The debt ceiling is the maximum amount the United States government can borrow to fund its obligations. It’s currently $31.381 trillion.

The debt limit is set by law. No one can raise it unilaterally, not even the President of the United States. The only way it can increase is through Congressional authorization. That is, Congress has to pass a law saying “We are raising the debt limit from x dollars to y dollars.”

One common misconception about the debt limit is that raising it automatically puts the federal government deeper into debt by authorizing new spending. Were this true, not raising the debt ceiling would be a great way to control the size of the federal government.

In reality, Congress must raise the debt limit so that the government can pay bills it has already agreed to pay: Social Security checks, Medicare reimbursements, veterans’ healthcare, military service members’ salaries, and on and on. Congress choosing not to raise the debt ceiling is akin to a business owner deciding not to pay her employees or a homeowner telling his mortgage servicer to stuff it.

But because this misconception is so prevalent, it’s tempting for politicians to use the debt ceiling as leverage in negotiations over future government spending. That’s what happened in 2011, when House Republicans successfully used the threat of default to get the Obama Administration to agree to spending controls, and what’s happening again in 2023.

In the summer of 2011, the government came within hours of defaulting before White House and Congressional negotiators finally hammered out and passed an agreement to raise the debt ceiling. The mere threat of default spooked financial markets and chilled demand for U.S. government bonds, sending yields higher.

Since a wide range of consumer and business credit products yoke their interest rates to U.S. bond yields, this temporarily increased rates on mortgages, auto loans, personal loans, and more — hitting consumers and business owners right in the wallet.

Why Does the Debt Limit Exist?

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https://www.moneycrashers.com/us-debt-ceiling-limit/?utm_source=apexmoney&utm_medium=dailynewsletter&utm_campaign=i-will-never-recommend-crypto

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