The Debt Ceiling: Government Borrowing from Itself

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You probably are aware that the U.S. has reached its debt limit (roughly $31 trillion) again. The Treasury Department has borrowed as much as is allowed by the last debt ceiling measure passed by Congress – an amount that is entirely arbitrary. To avoid defaulting on the federal government’s obligations, Congress must raise the debt ceiling. This is nothing new; the U.S. has reached the debt ceiling some 80 times since 1960, and Congress has increased it every time.

The federal debt ceiling is nothing like a personal, corporate, or municipal debt limit. It is not, for example, like a mortgage lender evaluating your income and credit score to determine how much you can borrow to buy a house. As the U.S. Treasury website explains, “The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”

Congress has yet to raise the current debt ceiling. The Treasury has done some maneuvering to slow down payments it is obligated to make in what it deems to be inessential areas, like contributions to government employee retirement plans. If the showdown in Congress continues, Treasury will add more visible items to the list, like interest and principal payments to government bondholders, Social Security benefits, Medicare reimbursements, payments to federal contractors, and the salaries of federal employees. We probably won’t reach that point until sometime in the late spring, because current tax revenues help fund some of those obligations.

If the government becomes unable to pay interest on government bonds, the U.S. would be considered in default of its sovereign debt. At that time, the U.S. could no longer borrow money from individuals, corporations, or governments – including itself. Yes, about 35% of the U.S. debt is owed to itself.