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April 6th, 2011 7:04 pm EST - By

What is the Debt Ceiling Limit?




There is currently a fierce debate underway in the United States over the country's "debt ceiling".

You may be scratching your head as to what exactly a "debt ceiling" is, and why politicians are so up in arms over it.

The debt ceiling is simply a cap on how much money the US federal government can owe. For instance, if the debt ceiling was set at $10 trillion, then the US government would be forbidden from incurring a total public debt load of over $10 trillion. This $10 trillion number includes both public debt (money that is owed to individual investors, foreign governments, pension funds, etc) and intragovernmental holdings (money that is owed to various government programs).

The Debt Ceiling - IllustrationThe debt ceiling is raised often in the United States. As a matter of fact, CNN reports that the debt ceiling in the United States has been raised 74 times since March of 1962 and 10 times since 2001.

The debt ceiling is currently set at $14.294 trillion. The US government currently owes $14.243 trillion dollars. According to US Treasury Secretary Timothy Geithner, the debt ceiling must be raised by May 16th, or else a "toolkit of emergency measures" will be needed to continue funding the government. These emergency measures would provide the government with an additional eight weeks of funding.

As the US gets closer to hitting the debt ceiling, the debate over raising the debt limit becomes even more heated.

What would happen if the debt ceiling wasn't raised in the country? In short - disaster. The US government relies on the borrowing of funds in order to operate, as expenses far exceed revenues at this time. If the government was unable to borrow funds, then the government would be shut down. This would result in all nonessential federal employees being sent home, national parks being closed, paper tax returns not being processed, etc. If the government subsequently admitted that it would be unable to meet some of its obligations, then confidence in the United States would evaporate overnight, leading to a massive crash in the dollar, dramatically higher interest rates (due to a loss of creditworthiness) and a crash in equities markets. The shock would quickly spread throughout the world and would very likely lead to a serious global recession, possibly worse than the one seen a few years ago.

In short - not coming to an agreement regarding the debt ceiling in the country would be suicidal for the nation's short-term financial well-being.

In the end, the debt ceiling will be raised. It will just be interesting to see how far this ends up going before a deal is finally reached between the two parties. Nobody wants to be known as the party who ended up being responsible for the country defaulting on some of their obligations, as that would be absolutely disastrous.




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