The debt ceiling simply implies to the maximum sum of money the federal government of the United States can borrow to fulfil its existing legal obligations.
As per Kavan Choksi Professional Investor, much like how a person can borrow money only up to a certain limit with a credit card, the federal government can borrow only the amount allowed by the debt ceiling. The debt ceiling was created under the Second Liberty Bond Act of 1917 and is also known as the debt limit or statutory debt limit.
Kavan Choksi Professional Investor provides a good understanding of the United States debt ceiling
The United States debt ceiling is among the most important yardsticks for measuring the state of the economy’s finances. When the nation is closer to its debt ceiling, it either indicates that the country requires more funds to accommodate improvement, has low revenue production or might be taking up more than it can handle. This can impact Americans as to pay off their debt, the government might be forced to raise taxes and/or up policies that lower purchasing power and lower the living standard.
Increasing the debt ceiling essentially refers to Congress increasing the amount of money the federal government is able to meet its distinctive financial obligations. This would ultimately enable a larger national debt. The Congress increased the debt ceiling by $2.5 trillion to a limit of $31.4 trillion in the December of 2021. However, that was far from the only occasion. In fact, the Congress has acted to increase, revise the definition of and extend the debt ceiling more than seventy five times since the year of 1960. Any change to the debt ceiling requires a majority approval by both the chambers of the Congress. It is quite a complicated issue that needs careful negotiation and consideration.
Kavan Choksi Professional Investor mentions that apart from increasing the debt ceiling, the congress may even suspend it for a particular period to remove the limit. As the suspension comes to an end, the Congress may increase the debt ceiling to accommodate the borrowing that has taken place. This approach was part of the Fiscal Responsibility Act of 2023, which has been used for suspending the debt ceiling until January 2025. An increase in the debt ceiling implies that the government would be able to fulfill its many responsibilities and promises. However, it also means that the U.S. will continue to borrow more money, which can weaken the value of the U.S. dollar.
The government borrows money from marketable securities like Treasury bonds, notes and bills when the national debt is below the debt ceiling. As the government reaches the debt ceiling, “extraordinary measures” can be undertaken for a limited time. However, as these measures get exhausted, the U.S. will default on its debt if Congress does not increase or suspend the debt ceiling. This can set off a domino effect, and cause great damage to the economy, the livelihoods of Americans and even the global financial stability. After all, the U.S. Treasury securities are seen as a benchmark for reliability, and majorly contribute to the value and status of the U.S. dollar as the world’s reserve currency.
