The debt ceiling is a limit on the amount of debt the United States can incur. U.S. debt has been rapidly increasing since the Reagan administration, when the country went from being the world's biggest creditor to the world's biggest debtor. Nevertheless, the country has honoured its debt and made its payments every year. It makes those payments out of the tax revenues it receives, and any shortfall is covered by selling Treasury bonds, to its own citizens and to foreign countries. As long as people see U.S. Treasuries as a good investment, the government will be able to pay what it owes.
If the U.S. doesn’t raise the debt ceiling, it loses the ability to pay its debts to bondholders and simultaneously keep the federal government running at its present level. No one knows what would happen, because such a situation has never arisen before. But one thing is sure: Whatever happens, it's going to be bad.
The worst-case scenario is that the U.S. defaults on its debt -- it doesn't pay what it owes to foreign creditors as bond payments become due. The U.S. dollar is the world's reserve currency because the rest of the world is confident that Treasury bonds are a safe investment because the U.S. will continue to honour its debts. If that should prove not to be true, the result would surely be world-wide panic and chaos of apocalyptic proportions. That would be disastrous indeed, but it won't happen. The bond obligations could and would be paid out of tax revenues that arrive every day.
However, after paying its bond obligations, the federal government would find itself short of the money required to operate government as usual. It would have to cut its spending across the board by something like 40%. That means everything: Social Security, Medicare, Medicaid, military expenditures, Congress, U.S. government offices, national parks, payments to contractors, food stamps, unemployment insurance, federal prisons, border security, the CIA and the FBI: 40% off the top. Alternatively, the government could elect to make very deep cuts in certain areas while sparing others.
That's a bad outcome, but it gets worse. Although creditors were paid, their confidence would undoubtedly be shaken: With the U.S. in critical economic condition, unable to pay for its day-to-day bills, could they be certain bond payments would be made the next time they came due, or would the U.S. choose different financial priorities? There would likely be a massive world-wide sell-off of U.S. Treasuries, and few new buyers. Interest rates would likely skyrocket from their present historical lows; borrowing for new development or for ongoing maintenance would become much more expensive. The fragile recovery in the U.S. could well falter and spiral into a second Great Depression.
The tragedy is that this "crisis" is completely artificial and unneccessary. It's political brinkmanship by the Republican party, which is determined to use present circumstances for political advantage.
The law establishing a debt ceiling, and requiring the President to go to Congress to request an increase, was passed in 1917. The ceiling has been reached -- and uneventfully increased -- many times in the past: Over the years, Congress has voted to raise the limit more than 60 times -- 18 times under President Reagan, 7 times under President George W. Bush.
Every time the ceiling has been reached and the President has requested that it be raised, the opposition -- be it Republican or Democratic -- has taken the opportunity to indulge in political theatre, condemning the Administration for its spendthrift ways. There are always a few votes cast against the proposed increase (while he was a U.S. Senator, Barack Obama voted against an increase in 2006 when it was requested by President Bush). But these votes are almost always symbolic, only taken when the lawmaker is certain the increase will pass. Never before has there been a serious threat to defeat such a bill, although sometimes opposition has been more than symbolic. Faced with such a situation in 1983, President Reagan wrote a letter to the Senate Majority Leader (excerpt):
"This country now possesses the strongest credit in the world. The full consequences of a default or even the serious prospect of default by the United States are impossible to predict and awesome to contemplate. [...] The risks, the cost, the disruptions, and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns. I want to thank you for your immediate attention to this urgent problem and for your assistance in passing an extension of the debt ceiling."
The Republican House of Representatives, prodded on by their Tea Party freshmen who took office in January, are insisting that the debt ceiling increase be tied to radical budget cuts. There is no justification for this; their only reason is to achieve a partisan political victory. They are attempting to force the Democrats to accept Republican demands to dismantle the social safety net, reversing the progress that has been achieved over the decades since Roosevelt's New Deal.
Bills passing previous debt-ceiling increases have consisted of one page -- in fact, one sentence. Absent Republican obstruction, the "crisis" could be ended tomorrow by passing a simple, clean bill. The next item on the Congressional agenda is the 2012 budget; Republican demands for budget cuts could and should be discussed then, not now.
