Raising the Debt-Ceiling: Irresponsible or Necessary?

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With the government still shut down, the focus of the national conversation has shifted somewhat from the appropriations or “spending” bills to the formerly procedural vote to raise the “debt-ceiling” or the authorization for the Treasury to pay the bills of the US government beyond a certain limit, currently $16.669 trillion. If the US were to default, the chances of entering a new recession are staggeringly high.

Before 1917, the US only took on debt for specific purposes, such as to build the Panama Canal. When the US entered the First World War, however, part of what it took to get the war declaration passed was a limit on the total amount of debt for the war effort. Skipping ahead to the New Deal programs, Congress insisted on an aggregate debt limit, and that is how we find ourselves in this situation.

Many of the people suggesting that the debt-ceiling should not be raised don’t fully understand either the scope of this limit or the concept of how “national debt” differs from “debt.” The first distinction that must be made is that the debt-ceiling has nothing to do with spending or taking on more debt (technically). Instead it allows the US Treasury to pay back money that was already borrowed.

For example, if someone had a US Treasury Bond that matures six weeks from now, that person would not be able to cash it in if the debt-ceiling is not raised. Thus, even though it was money already borrowed by the US government, it could not pay it back.

In fact, the US reached the debt ceiling months ago. However over-two thirds of US debt is held domestically, some by the federal government itself. Yet, the “extraordinary measures” that Treasury is able to take to stave off default will be exhausted by October 17. All that would be accomplished by this debacle of a debt-ceiling “debate” is that the creditworthiness of the US will suffer and thus the debt will increase even further because it will cost the government more. Investing in the United States of America was once the surest financial bet anyone could make, but if this continues it may become a risk that none are willing to take.