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The US debt ceiling: What it is and what happens if Congress doesn't raise it

Congress voted to raise the US borrowing limit -- but only until December. It's on the way to President Biden for his signature. Now, the idea of minting a trillion-dollar coin is floating around once again.

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The US government has never defaulted on its debts -- but Senate Republicans' maneuvering is threatening to shatter the nation's financial track record. At the center of the congressional fight is a somewhat obscure bureaucratic mechanism: the debt limit, which is the amount of money the government is legally allowed to borrow. Failing to raise or suspend it could lead to dire financial consequences that could have an impact on every part of the US economy.

The Democratic-led House of Representatives narrowly passed a bill along party lines on Sept. 21 to fund the US government through the beginning of December and suspend the debt ceiling until the end of 2022. But Senate Republicans blocked the measure on Sept. 27 -- not a single Republican voted in favor -- setting the stage for a clash. The US government would run out of money on Oct. 18, Treasury Secretary Janet Yellen told Congress on Sept. 28.

The stakes are high. If the ceiling isn't raised or suspended, it will almost certainly have an impact on the US economy at a macro level, with experts forecasting interest rate spikes and plunging stock prices. And the effects will surely be felt on an individual basis, too, as a government spending freeze would reduce or eliminate funding for vital programs, including food assistance for low-income Americans, Medicare and Social Security, and payouts to retired veterans. 

Read on for more about this complex, thorny issue and what it 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, paying for tax refunds and paying to service its already significant national debt, which currently stands at roughly $28 trillion.

When does the current debt ceiling 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 -- including in 2019, when it voted to suspend the debt limit for two years. That two years was up on Aug. 1. If Congress doesn't act, the US government will be unable to meet all its obligations in full and on time somewhere between Oct. 15 and Nov. 4, according to a recent analysis from the Bipartisan Policy Center.

Where do things stand?

After pressure from President Biden and finance executives on Wednesday, Senate Minority Leader Mitch McConnell (R-Kentucky) 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 Twitter statement

Although the Senate finally voted to raise the debt limit on Oct. 7 night -- a mere 11 days before the US Treasury ran out of money -- this accommodation is only a short-term fix as it only provides enough borrowing to hold the Treasury over until December. The House of Representatives also approved the bill to avert the default on Oct. 12, sending it to President Biden for his signature.

Republicans continue to insist that Democrats use budget reconciliation to raise or suspend the debt limit over the long term. 

Created by the Congressional Budget Act of 1974, budget reconciliation allows Congress to expedite tax, spending and debt limit legislation. Importantly, reconciliation bills aren't subject to the filibuster in the Senate; instead, they require only a simple majority of votes. As such, all 48 Senate Democrats, the two Independents who caucus with them and tie-breaker Vice President Kamala Harris would have to vote in favor of the bill for it to pass. In September, Senate Majority Whip Dick Durbin (D-Illinois) said that using budget reconciliation is "a nonstarter." 

What's the broader political context?

Congress faces two key issues, one of which was resolved on Thursday, Sept. 30. First, Congress needed to pass a spending budget to fund the US government to avert a shutdown. The other issue is the suspension of the debt ceiling, which would allow the US Treasury to borrow more money to pay its ongoing financial obligations.

To avert a government shutdown, Congress needed to pass some sort of government funding package by Thursday, the end of September. However, legislators haven't yet hashed out a full budget. To avoid a shutdown, on Sept. 21 Democrats in the House of Representatives passed a continuing resolution -- essentially, a stopgap measure -- to keep the government funded at its current level until sometime in December. But the House's resolution included a debt limit suspension for the US Treasury, a provision that Republicans in both the House and Senate opposed.

Both chambers of Congress approved a measure on Thursday, Sept. 30, to fund the US government through Dec. 3, averting the government shutdown that was set to occur at midnight. President Biden signed the bill that evening. However, the debt ceiling issue was left to the side for now, leaving Congress with the significant problem still on the table. 

Why is the GOP refusing to increase the debt limit?

Although Republicans and Democrats alike voted to lift the debt ceiling on three occasions while Donald Trump was president, Republicans have framed passing another 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 Tuesday. 

On Sept. 27, Senate Republicans voted to kill a resolution that would have suspended the debt ceiling, funded the government and averted a shutdown. Senate Majority Leader Chuck Schumer, a Democrat from New York, voted no to allow him an opportunity to call another vote on the issue.

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?

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 last week.

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 all the US' debts and call it a day? 

The idea of the trillion-dollar coin emerged in debt ceiling battles during Obama's presidency, and while talk of the idea went silent for a number of years, it's returned during the current 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 it 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, 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 me?

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. 

Given that we are still navigating our way through the COVID-19 pandemic, the debt ceiling standoff couldn't come at a worse time. Defaulting "would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency," Yellen wrote.