The Debt Ceiling

What is it?
A artificial limit that the government can accrue debt.
The word "debt" shouldn't be viewed as a negative word. The government having debt is an entirely different idea than a person having debt.

There are many government run services that exist beyond the well-known social security and medicare/medicaid. Some of the more obvious ones that you might not even think about are the interstate highways and bridges, municipal airports, and the power and water grids.
In order to run this, the government obviously needs money. For example, if the government was a person named Bob. Bob owns a store. In order to run his business he has some overhead costs such as rent, power bills, cost of getting his product, and so on. To pay for all of this Bob sells his products from his store front and uses the money generated to pay down his costs and if there is any left over, invest in making his business better. Well the government is the same way. The government needs money in order to pay for your use of certain services. In order for the government to pay for these services they have people pay taxes. If everyone paid their taxes, they are giving the government a little bit of money to be able to use and take advantage of the services the government provides.

A problem we have now is not everyone pays their taxes, but that is a story we'll get into later. When there is not enough money taken in through taxes, the government needs a "second form of income." Much like Bob would do to expand his business, the government gets a loan. The total value of these loans is the government debt. The government issues their own debt by selling bonds. These bonds work by the government saying, “you give us $5,000 now and in return we’ll give you this bond note. In 5/10/20/etc... years you can show us this bond and we’ll give you back your $5,000 plus some amount of interest. If you cash in your bond before the time is up though you don’t get as much money.” The government puts the full faith and credit of the US government up as collateral for the bond, meaning that the government would have to go bankrupt for the bonds to not pay out. Since the government sells its bonds only in US dollars the government can never go bankrupt because it can always print more dollars to pay off the bonds.

That is how it should work at least, except we still have this debt ceiling thing hanging around. The concept of the debt ceiling really is outdated and not needed today. It was created during WWI when the economy ran off of the gold standard, which is tying the value of money to the total amount of gold you have. This created a limited amount of money that the government could print. Since every dollar printed had to be backed by gold this limited how much debt the government could get into and that limit was the debt ceiling. Today, we run on a fiat system and we can print as much money as we want. This happens because the dollar’s value is set by the Federal Reserve through controlling the amount of money in circulation. The more money in circulation the less valuable each piece of currency holds the less currency the more value each piece holds. Another way of saying it is the less money in circulation the more you can buy with your dollar, the more money in circulation the less you can buy. When we moved off the gold standard we never got around to getting rid of the debt ceiling however.

So really, the debt ceiling is like having an appendix. It is no longer needed, but when something goes wrong it still needs to be dealt with. The reality is, you could live without it.


Congress has to vote to raise the debt ceiling every time we reach it and has done so as a matter of routine the last dozen plus times the vote has come up. This time however Republicans in Congress made their vote on raising the debt ceiling conditional on Democrats agreeing to spending cuts in the budget on an equal amount. So for every one dollar that the debt ceiling was raised by, the budget deficit must see one dollar decrease. The budget deficit is merely any money in the budget that must be covered by bonds instead of tax revenue.

Democrats agreed to their demands and the argument then became to what degree the budget cuts were going to come from spending cuts vs. revenue increase. The political narrative started coming out of Washington saying that these budget cuts were necessary for raising the debt ceiling. Remember though, there is no connection between the two and the only reason they are tied now is because politicians say so.


If we don’t agree to raise the debt ceiling by 02 August 2011 then the government will no longer have the ability to pay off its debts as well as pay for the programs it is supposed to fund listed in the budget. The plan that looks like will make its way through both chambers of Congress to raise the debt ceiling will end up cutting $2.1 trillion over ten years from the budget. Don’t let the big numbers trick you into anything. This amounts to about 1/10^th or so of our total current debt.

Not only does this plan create a significant change in our debt but it will further damage our already very unstable economy. Our economy suffers right now from a demand crisis, meaning that companies have plenty of goods to sell to consumers, however consumers lack the ability to buy the goods. This is because there is massive and wide spread unemployment and for those that are employed, many face crushing levels of debt that prevent them from spending freely. Many of these people are only able to stay as afloat as they currently are because of government services like unemployment benefits, welfare, foodstamps, and living assistance programs like money for heating oil. These are the very same programs that will see cuts in the plan snaking through Congress right now, further hurting demand in the economy, thus making the economy worse.

Why then does Congress and president Obama insist on pushing this deal through even though it will hurt the economy? The answer to that question is for another post.

-ElfEnnerji