And for that matter, what the heck is the debt ceiling? Well you definitely know what our national debt is. It’s the collection of trillions of dollars that our government owes to investors in the bonds and bills that they issue. A decently informed citizen would know this number is over $10 trillion. It would be impressive if you knew it’s fast approaching $12.3 trillion to be exact.

Thankfully, we have a law that keeps the national debt from getting out of hand. See, our Congress sets a limit on the amount of debt that can be issued. They’re not the brainless politicians we thought they were! They actually have a handle on all this debt. Without Congressional approval, the Treasury Department can’t just issue more debt. Checks and balances for the win right?

But wait. Going back as far as 1940 (the furthest I found), Congress has voted to raise the debt ceiling almost every year. On Christmas Eve last year, they voted to raise the debt ceiling to $12.394 trillion. So this debt ceiling stuff is more like a formality than actual legislation designed to reign in spending, like declaring war before you invade a country.

But let’s assume for a moment that someone in Congress actually had the stones to rally his/her colleagues to vote against an increase in the national debt ceiling. This means that the government will basically be barred from issuing new debt.

What would happen if the government couldn’t borrow money anymore?

From just a fiscal standpoint, two things would immediately happen: taxes would shoot up and government spending would tank. Because so much of our economy relies on government spending (financed with borrowing) there would be economic repercussions from all the spending cuts. With higher taxes, businesses and people alike will have less money to spend, and the economy would suffer a double blow.

If the government is banned from borrowing more money, it could send a signal that the government can no longer afford the interest on their debt (even with getting more debt) and the nation could default on debt. The chances of this increases as interest rates rise.

People that currently own government bonds will want to get out of them, creating a selling frenzy and killing the value of the bonds.

I could go on and on and on about what could happen. The truth is no one will know with certainty because people are unpredictable. With a team of economists and a warehouse full of that whiteboard paint I’m lusting over you still wouldn’t know for sure. But just for the sake of fun I’ve created a scenario:

Immediately everyone’s tax rate jumps by 25% and the federal budget is cut 10%. Tax refunds are postponed by 2 years until the budget crisis (as it would be called) is fixed. Existing Treasury debt tanks in value and Wall Street encounters another financial crisis as only the Fed has any sliver of a chance to control the economy. But anything they do is not enough. Everyone stops buying stuff because no one knows what the dollar is worth anymore. The Chinese Yuan spikes in value (because it’s been kept artificially deflated) and the Chinese invest in all the private businesses in the US lifting us out a depression caused by the budget crisis. The whole process takes more than 3 years.

The effect of not raising the debt ceiling is ripping off the bandaid of a wound that needs to be cleaned. Our debt is insanely high, with no sign of going down. At some point we won’t be able to pay our debts. This might be at $100 trillion in national debt our $15 trillion. The truth is it’s probably closer to $100 than $15, but that is no excuse.

Congress must reign in spending, but the truth is no one wants to be the Congress that finally takes the cake away from the fat kid. It’s political suicide. What we can, and should hope for, is to slow our borrowing so much that our GDP can catch up and pass some kind of threshold like 30% of GDP, instead of the 100% we’re fast approaching. This would take a while.

PS, after I wrote this post the Senate passed a bill to raise the debt ceiling from $12.4 trillion to $14.3 trillion, which is just $0.1 trillion less than our GDP last year.

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categories: economics, government