Mauro A. Johnson

The US Treasury has warned that as early as Oct. 17 it will no longer be able to cover all the government's rising financial obligations. If the government wants to keep paying all its bills, Congress must allow the Treasury to borrow more money – in other words, raise its debt limit.Therein lies the rub. Many Republicans are uneasy with America's fiscal path and want to use this moment to address it (as well as other issues). Most Democrats say a debt ceiling deadline is too important to hold "hostage" to political horse-trading. We say it's a complicated topic that could use a little explanation.Here’s your guide to the debt limit deadline and its implications.

17 hours ago

The US Treasury has warned that as early as Oct. 17 it will no longer be able to cover all the government's rising financial obligations. If the government wants to keep paying all its bills, Congress must allow the Treasury to borrow more money – in other words, raise its debt limit.

Therein lies the rub. Many Republicans are uneasy with America's fiscal path and want to use this moment to address it (as well as other issues). Most Democrats say a debt ceiling deadline is too important to hold "hostage" to political horse-trading. We say it's a complicated topic that could use a little explanation.

Here’s your guide to the debt limit deadline and its implications.

1. What is a debt ceiling, exactly, and how high is it now?

It’s a Congress-imposed cap on the amount of money the US Treasury can borrow from two sources. The first is “debt held by the public,” mainly Treasury bonds owned by investors in the US or in other nations. The second is “intragovernment” debt, which happens when the Treasury borrows from another government account that has a surplus, such as Social Security.

Since May, the debt limit has been set at $16.7 trillion.

Borrowing is needed when there aren’t enough tax revenues to cover all federal spending. And for decades, the trend has been that Congress arranges for the government to spend more than it takes in as tax revenue. Budget surpluses have been rare.

In September the Department warned that another hike is needed or the Treasury won’t have funds to cover all Congress-ordained spending.

2. Is the debt standoff the same thing as the "government shutdown"?

No. The fact that the shutdown and the debt-limit standoff have happened in the same month this year is coincidental.

A so-called shutdown involves closing parts of the federal government when Congress fails to pass spending bills to fund them. It doesn't matter whether the government is in deficit or in surplus – so long as Congress has agreed to fund federal programs either for the entire fiscal year (via a budget) or for a shorter amount of time (via a continuing resolution), there will be no shutdown.

This is what happened on Oct. 1. Congress failed to pass a budget for a new fiscal year or a continuing resolution as a stopgap for a few months. What followed has been really a partial shutdown of the government. Money for things like operating the national parks has run out, but “essential” services like national defense and air-traffic control are still funded.

The debt limit, by contrast, comes due periodically so long as the government is spending more money than it takes in (which, admittedly, is most of the time). Congress sets a limit for how much money the Treasury can borrow to pay US bills, and when that is no longer enough, Congress must raise the debt limit or end deficit spending. President Obama has described a vote to raise the cap as a vote “to pay the bills on what Congress has already spent.”

3. How many times has Congress raised the debt ceiling?

An overall cap on federal debt has been in place since 1939, and Congress has raised it numerous times since then. The Treasury Department counts 78 times since 1960.

The initial limit prior to World War II, by the way, was $45 billion. That may sound small today but was a lot of money at the time – equal to about half of a year’s gross domestic product (GDP), the value of goods and services produced by the country.

4. Is the US required to have a debt ceiling?

No. The Constitution allows Congress to arrange to borrow money, and doesn’t require any limit on borrowing.

But “Congress has always placed restrictions on federal debt,” notes a report this year by the Congressional Research Service. Even before there was a cap on aggregate borrowing, legislators set limits on how much borrowing that could occur, and for what purposes. Behind that stance is a lesson of history: Too much debt can be a dangerous thing, whether it’s for a person, a business, or a nation.

Mostly, other nations do not have debt ceilings, but that doesn’t mean they don’t have no policies related to debt. In 2011, a Government Accountability Office report offered up only one nation, Denmark, that sets an official cap on borrowing the way the US does. But nations find other ways to keep watch on debt.

The report said “other countries that we reviewed generally use fiscal rules or targets to increase attention to … fiscal policy decisions that lead to an increase in debt.” Members of the European Union, it noted, agree to the following targets: total debt no greater than 60 percent of one year’s GDP, and annual deficits no greater than 3 percent of GDP.

5. Is the debt ceiling a good idea?

Some economists say it’s an unnecessary ritual. If Congress wants to keep better watch on the national debt, it can do so by other means. The legislators can easily view reports by their own accounting experts (the Congressional Budget Office) to see estimates of how their tax-and-spending decisions will affect total debt.

Other finance experts say the cap can serve a purpose, nudging lawmakers to focus periodically on the long-term consequences of their fiscal habits.

Sometimes lawmakers negotiate over the debt cap, linking a hike to efforts at deficit reduction or other budgetary reforms. But it can be dangerous for the economy if the process leads over a cliff toward a possible default by the Treasury on US obligations.

6. Is the national debt out of control?

It’s fair to say that the US has deep fiscal challenges. There is some good news that Obamatrumpets: Federal deficits are falling, and the Congressional Budget Office says the national debt promises to stay roughly stable as a percentage of GDP during the next decade. All that, coupled with fact of historically low interest rates on Treasury bonds argues against the notion of a near-term fiscal crisis.

But economists don’t view this as a time to be complacent, either.

The debt already equals a full year’s GDP, which is a very high level compared with most of US history. Many economists would prefer to see a level of 60 or even 30 percent of GDP. And without a course correction, the current path doesn’t lead there. Instead, it leads to a steady rise in debt after 2023. That’s mainly because the nation’s changing demographics push up the cost of entitlement programs such as Medicare.

If a nation’s debt keeps rising higher, it could signal an unsustainable course. The risk grows that America will lose standing as a magnet for global investment. Interest rates could rise and economic growth could slow, so that living standards grow at a slower pace. At a minimum, a high debt-to-GDP ratio leaves a nation little cushion for emergencies.

7. Would a refusal to raise the debt ceiling help control the national debt?

Few people view this as a good way to tame the debt.

Yes, keeping the current cap in place would stop all borrowing. But if it caused a financial crisis in the process – as some economists predict – that could end up worsening the nation’s fiscal position. In a recession tax revenues typically go down, and federal spending goes up. By contrast, in the current economic recovery federal spending is falling as a share of GDP, and tax revenues are rising.

Moreover, refusing to raise the debt ceiling would not address the cause of the problem: The programs that are leading to all the deficit spending would still be on the books.

8. What does it mean to default?

For national governments, the word “default” typically means the failure of a nation to service its debts in full and on time. If the US Treasury fails to make its full payments of interest or principal to bond holders, it has defaulted. That would be a sharp setback for investor confidence.

US Treasury debt is held by legions of investors around the world, from ordinary American families to large banks and hedge funds. Nearly half of the debt issued to investors is held abroad, with China and Japan leading the pack by far. Those two countries each hold more than $1 trillion in Treasury debt.

9. What are the Treasury’s options if Congress does not raise the debt limit?

The Treasury can use some extraordinary measures to postpone default. One example is underinvesting in certain government funds. But Treasury officials say they can’t use gimmicks to delay a day of reckoning for very long.

Treasury Secretary Jack Lew said that “once the final extraordinary measures are exhausted, no later than Oct. 17, we will be left to meet our country’s commitments at that time with only approximately $30 billion. This amount would be far short of net expenditures on certain days, which can be as high as $60 billion.”

This would be uncharted territory. As Secretary Lew put it, “it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”

At that point, some finance experts say, the Treasury should prioritize how it uses the funds that come in from tax revenues, so that interest on Treasury bonds is paid before other obligations.

But the Treasury would still have to limit or delay payment of other obligations ranging from salaries to hospital payments under Medicare. Financial markets might view that as a serious breach of trust. Lew has called it “default by another name.” And the Treasury’s systems are so vast that an effort to pay some bills but not others could be chaotic.

The first 20 business days after the Treasury hits its wall would see about one-third of all federal bills (by dollar volume) go unpaid, according to an estimate by the Bipartisan Policy Center in Washington. That would represent some $106 billion in missed payments.

10. Can Obama solve this some other way?

If Congress fails to raise the debt limit, the options dwindle quickly. Some commentators have called for the minting of what’s been dubbed a “magic coin” for a large denomination such as $1 trillion. Others say the president could cite the 14th Amendment to argue that the debt limit is unconstitutional. (The amendment says “the validity of the public debt … shall not be questioned.”)

But the Obama administration has voiced opposition and skepticism regarding these ideas. On Oct. 8, the president said such ploys could leave the issue tied up in court and would do little to reassure investors about America’s fiscal politics.

The only good solution, the Treasury secretary says, is for Congress to raise the debt limit.

11. Has the US Treasury defaulted before?

Obama and others have said the US has never defaulted. In fact, though, at least a small instance of technical default has occurred, economists say. In the spring of 1979, some investors in short-term Treasury bills faced delayed payments. The Treasury blamed the glitch partly on Congress’s failure to act in a timely way on the debt ceiling, and partly on problems with its computer equipment.

Some economic research concludes that even this small instance of default had a lasting negative effect, pushing up federal borrowing costs. In recent testimony on Capitol Hill, Mark Zandi of Moody’s Analytics said the incident “has cost us tens of billions of dollars.”

12. What would a default mean for the US and world economy?

Economists widely agree that the effects of a debt default – or even of the Treasury failing to meet billions of dollars in ordinary obligations – would be swift and severe. It’s hard to know just how severe because, again, this hasn’t been tested before by the world’s leading economy.

Interest rates would rise as investor confidence is shaken, and the Treasury would face the prospect of downgrades by credit-rating firms. The squeeze on federal spending (imposed by the borrowing cap) would deal a blow to economic activity equaling about 4 percent of GDP, some forecasters estimate.

The stock market could plunge, and consumer confidence along with it.

The toll in the US would have global fallout as well, pushing up interest rates and squeezing economic growth.

Even if Congress goes near this cliff and then raises the debt limit by Oct. 17, the brinkmanship could have noticeable consequences. In 2011, when Congress got close to the edge before cutting a deal, Standard & Poor’s gave US sovereign debt a downgrade. Mortgage costs jumped and consumer confidence sagged. Stock prices overseas fell alongside US stocks.