Why Everyone's Talking About the Debt Ceiling

Published on: Dec 7, 2021fb-roundtwitter-roundemail-round
Capitol BuildingDesign: theSkimm | Photo: Getty Images
The Story

Lawmakers have been in a tense standoff about whether to raise the debt ceiling. 

Back up. What's the debt ceiling?

The max amount of money the US can borrow (by issuing bonds) to pay its bills. Increasing the debt ceiling or getting rid of it altogether allows the gov to make good on its existing debt – not spend more in the future.

Since 1960, Congress and the president have adjusted the debt ceiling almost 80 times. During the last administration alone, Congress raised the ceiling three times before agreeing to a two-year suspension in August 2019.

Go on.

On August 1, 2021, the ceiling was reset to its current level around $28 trillion. Since then, Uncle Sam has been using "extraordinary measures" to temporarily cover the bills. Like saying 'not right now' to issuing special Treasuries that typically help state and local govs with their own finances. And replacing regularly scheduled contributions to a federal employee retirement fund with an IOU. But even those back-up measures are running out.

Then what happens?

Default. Treasury Secretary Janet Yellen asked Congress to increase the debt limit ASAP. Or else the US would run out of money by October 18 to pay its bills for the first time ever. Yellen said that would lead to "widespread economic catastrophe." Think: no Social Security checks, no pay for our troops, no food assistance, and delayed child tax credit payments.

Ouch.

But wait, there's more. Just like you have a credit score, America does, too. That lets the world know that the US is financially strong and can be trusted to repay its debts. Defaulting means it'll take a hit, which could trigger higher interest rates, lower stock prices, and other kinds of economic distress. Including a recession. Moody's Analytics analysis says it could cost the US six million US jobs and $15 trillion of household wealth.

That sounds bad. So what's the debate about?

Politics. Along with Secretary Yellen and President Joe Biden, Democrats are pro-raising the debt ceiling with bipartisan support. GOP leaders have said they'd rather Dems raise the debt ceiling without Republican support just like they're trying to do with the proposed $3.5 trillion social spending package. Psst...Congress played a similar game under the Obama administration. Recap: in 2011, the drama led to the US credit rating getting downgraded for the first time in history – even though lawmakers did raise the ceiling just in the nick of time.

Is that going to happen again?

Maybe. On October 14, Biden signed a bill to temporarily increase the debt ceiling by $480 billion — just enough for the gov to pay its bills until December 3. In November, Yellen updated the debt ceiling deadline to December 15, thanks to the infrastructure bill. After that, default. No pressure.

theSkimm

Lawmakers have reached a short-term agreement to raise the debt ceiling. But this convo isn't over. If Congress can't come up with a new solution by mid December, Uncle Sam could default on his bills. Which could have disastrous results for the economy. Final decision: still TBD.

Want more Skimm Money?

Say ‘hi’ to our weekly newsletter. Every Friday, we break down the news and info you need to make smarter money decisions.

I'm in

Updated on Dec. 7 to reflect the latest debt ceiling deadline

Skimm'd by: Kamaron McNair, Ivana Pino, Casey Bond, Stacy Rapacon, and Elyse Steinhaus