The US government has never defaulted on its debt, and it just avoided that possibility today when President Joe Biden signed into law a debt ceiling increase of $2.5 trillion. Congress had sent the bill to Biden's desk on Wednesday just hours before Treasury Secretary Janet Yellen warned the country could exhaust its funds used to pay debts.
Failing to raise or suspend the debt limit, which is the amount of money the government is legally allowed to borrow, could have led to dire financial consequences impacting every part of the US economy. The bill went forward narrowly along party lines, with Democrats voting in favor.
The debt ceiling battle was especially high stakes given the ongoing COVID-19 pandemic. Experts forecasted potential interest rate spikes and plunging stock prices. A government spending freeze could have also reduced or eliminated funding for vital programs, including food assistance for low-income Americans, Medicare and Social Security, and payouts to retired veterans.
The question is when we'll see the next debt ceiling crisis, since the one before this was 2013. For a lengthier timeline, you can see the 100 year history of the debt ceiling on the Bipartisan Policy Center website. As for what happened this time around, here's what we know and what this complex issue means for you.
What is the debt ceiling?
The debt ceiling, also known as the debt limit, is the amount of money the US Treasury Department is allowed to borrow to pay its bills. Because the revenue collected from income taxes isn't enough to cover its expenditures, the US government borrows money to pay for many essential functions. These include providing Social Security and Medicare benefits, paying the salaries of military personnel, covering tax refunds and servicing its significant national debt, which currently stands at roughly $29 trillion.
When was the latest debt ceiling set to expire?
Congress sets the amount of money the US Treasury Department can borrow, and since 1960 it has raised, extended or revised the debt ceiling 78 times before 2021 -- including in 2019, when it voted to suspend the debt limit for two years. Those two years were up on Aug. 1. If Congress didn't act, the US could have defaulted on its debts as early as Dec. 15, 2021, according to Yellen. This week, the debt ceiling was raised again by $2.5 trillion.
Where do things stand?
After pressure from President Joe Biden and finance executives earlier in October, Senate Minority Leader Mitch McConnell said he would "allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels in December," according to a statement he posted on Twitter.
Although the Senate finally voted to raise the debt limit on the night of Oct. 7 -- a mere 11 days before the US Treasury ran out of money -- this accommodation was only a short-term fix, as it only provided enough borrowing to hold the Treasury over until December. The House of Representatives followed suit.
The US House then passed a bill on Dec. 7 that set up new procedures in the Senate to raise the debt limit. Rather than needing 60 votes (as required for most legislation in the Senate), the procedure sets up an additional vote on the issue that only requires a simple majority of Senate votes -- but just this one time. Mirroring the House, the Senate enacted this fast-track process. This maneuver allows the GOP to "wash its hands" of the decision by allowing Democrats to raise the debt ceiling on their own.
Following these new procedures, Congress raised the debt limit by $2.5 trillion, sending it to President Biden's desk early Wednesday. The passage of the bill in both chambers of Congress was narrow, with Democrats voting in favor: 50-49 in the Senate and 221-209 in the House. Just one Republican joined the Democrats in the House.
President Biden then signed the bill on Thursday and averted US default. Senate Majority Leader Chuck Schumer said this increase was "commensurate with funding necessary to get into 2023."
Why did the GOP refuse to increase the debt limit?
Republicans and Democrats alike voted to lift the debt ceiling on three occasions while Donald Trump was president. But Republicans framed passing another increase or suspension as enabling a "spending binge," in the words of Sen. Pat Toomey, a Republican from Pennsylvania, who spoke at a Banking, Housing and Urban Affairs Committee hearing in September.
Why is there a debt ceiling?
The debt limit "was instituted by Congress during World War I to give the Treasury Department more discretion in making federal spending decisions," according to Perry Adair, attorney and consultant at the federal lobbying team of Becker Lawyers. "Before the limit, Congress had to issue bonds individually -- in the same way they passed any other bill."
This made it significantly harder to finance the war since Congress needed to approve each bond separately. The creation of the debt limit was its response to this burden. Thus, nowadays, Congress can vote to either raise the debt ceiling or suspend it all together, according to Adair.
What's the difference between raising and suspending the debt ceiling?
"Raising it would simply increase the amount of debt the country can take on," Adair said. "Suspending it would instead allow for limitless borrowing until a date Congress specifies."
What happens if Congress doesn't raise or suspend the debt ceiling in the future?
We don't know exactly what will happen. This would be an unprecedented event. But the impact could be cataclysmic for the US economy and cause ripples across the world. And that is what many US officials are warning of. The consequences would "produce widespread economic catastrophe," Yellen wrote in The Wall Street Journal.
The US government would be forced to finance its debt obligations with whatever cash it has on hand. After it burns through that, the government would likely default on its remaining debts.
Could the US mint a trillion-dollar coin made of platinum to avoid the default?
Here's a wonky idea resurfacing in the debt ceiling debate: The US Treasury will only default if it doesn't have money to pay its debt, so why not mint a trillion-dollar coin made of platinum, pay the entire debt and call it a day?
The idea of the trillion-dollar coin emerged in debt ceiling battles during Barack Obama's presidency, and while talk of the idea went silent for a number of years, it returned during this year's debt ceiling crisis. The idea stems from the Coinage Act, which prescribes limits on how many gold, silver and copper coins the US Treasury can circulate at one time. But according to subsection (k) of the act, there isn't a limit on how many platinum coins it can circulate, nor does the act prescribe limits on the value those coins can be minted at.
If the US government minted such a coin, it could wipe out its debt swiftly, nullifying the debt ceiling issue in the process.
But this is a completely theoretical idea, and not something worked out by experts. Yellen said on CNBC that she opposes the idea of the trillion-dollar coin, calling it "a gimmick" and reasserting that "it's necessary for Congress to show that the world can count on America paying its debt."
How would defaulting affect the US economy?
The impact would be acute and widespread. Millions of Americans wouldn't receive Social Security or Medicare benefits. The federal government would stop issuing paychecks for all US troops and federal employees, and only certain essential federal employees would be allowed to work. According to a report published by Moody's Analytics, the US GDP would decline, approximately 6 million jobs would be lost and the unemployment rate would increase dramatically. And, just as significantly, the country's track record, at least as far as paying its debts is concerned, would be irrevocably stained.
"Internationally, the United States will have for the first time undermined the full faith and credit of its own currency -- a blow to our standing in the world and a boon for our adversaries such as China who are arguing to the world that the US is on the decline," Adair said.
How could it affect you?
As with so many catastrophes, the economically disadvantaged would be disproportionately affected. Food assistance benefits would stop nationwide, monthly child tax credits would be delayed and compensation for veterans and pension payments would lapse. And state and local governments would no longer have access to federal aid when responding to emergencies like COVID-19 or natural disasters.