Kavan Choksi Business Consultant Provides a General Understanding of the United States Debt Ceiling

The debt ceiling or debt limit implies to the maximum amount of money that the United States can borrow cumulatively for the purpose of meeting its existing legal obligations. As Kavan Choksi Business Consultant mentions, the debt ceiling was created under the Second Liberty Bond Act of 1917. In case the government national debt levels of the United States bump up against the ceiling, then its Treasury Department must resort to certain extraordinary measures to pay government obligations and expenditures till the ceiling is raised again. Over the years, the U.S. debt ceiling has been raised or suspended numerous times in order to avoid a default by the U.S. government on its debt.

Kavan Choksi Business Consultant offers an overview of the United States debt ceiling

The debt ceiling is the total sum of money the United States government can borrow in order to meet its existing legal obligations.  These legal obligations are approved by the Congress and tend to include funding for things like military salaries, Medicare, Social Security, as well as interest on the national debt and tax refunds. If the U.S. comes close to hitting the debt ceiling and it is not raised, the government will not be able to pay its bills, leading to a default.

The United States government defaulting on its debt is likely to spell disaster on a national and global scale. Democrats and Republicans very often wage a battle over the debt ceiling. Since the year of 2002, the Congress has taken action on the debt ceiling more than 20 times. The U.S. has defaulted only once, and it was due to a technical glitch in 1979. But it does have come pretty close before. In fact, in 2011 the negotiations dragged on so long that the S&P downgraded the U.S. credit rating. This ultimately contributed to volatility in the markets.

As Kavan Choksi Business Consultant says, a default that lasts more than a few days can even result in a financial crisis whose effects are around the world. If the U.S. government defaults on its debt then it can lead to the tanking of the stock markets, money market funds selling, delayed tax refunds, and increased interest rates on lending products and mortgages. It may also tighten credit requirements and accelerate the arrival of a recession.

Certain people consider the debt ceiling and the national debt to be the same, but so is not the case, even though they do relate to one another. The debt ceiling basically is the total sum of money the government is allowed to borrow before it defaults. On the other hand, national debt implies to the total amount of outstanding money that is currently borrowed by the federal government, along with interest. Refusing to vote to lift the debt ceiling cannot bring down the national debt; rather it would mean that the government cannot repay the debt it already has.

As the spending of the government surpasses revenue in a fiscal year, it runs a budget deficit. In order to pay the deficit, the federal government tends to borrow money by selling what are known as “marketable securities.”  This can include Treasury inflation-protected securities, or TIPS, notes, bills and Treasury bonds. The total debt tends to include both the amount borrowed plus the interest that it promises to those who lent money by buying marketable securities.