Just like everyone else, we are seeing and hearing a ton of conversation around the debt ceiling for the US.
So first, what is the debt ceiling?
In short, the debt ceiling is the total amount of money that the United States government is allowed to borrow to meet its debt obligations. It is actually very similar to your personal credit card limit that you aren’t allowed to spend over a certain limit. As a country, we have a limit set by politicians that defines the amount of money we are allowed to borrow.
Why do we have a debt limit?
For that, we have to go all the way back to World War 1. In order to finance the participation of the US in the war, there was a law created that allowed the government to issue bonds to do so as there was a good amount of push back against entering the war. The law was passed to allow a debt limit of a few billion dollars and since then, the debt limit has routinely been increased to continue funding of government spending.
Since 1960 we have raised the debt limit 78 times. Today, we sit at a debt limit of $31.4 trillion.
What is happening now?
The overall fear this time is that the politicians will not be able to find a happy middle ground in increasing the debt ceiling going forward. And since we have never had a time in history that we haven’t increased the limit, no one really knows what that would look like.
However, we have had close calls before. In 2011 we had a very similar situation that was solved pretty close to the wire as well.
Ultimately, this is not the first time we have been here and it most likely won’t be the last either. It is unfortunate that we are pulled through this every couple years at this point but at the end of the day neither party can allow the debt ceiling to be reached without a deal passing through.
There will be a lot of noise around this and more headlines to come. However, we are expecting a deal to be passed and these headlines to subside. But don’t be surprised if we are back here in the future.