NEW YORK (CNNMoney.com) -- Congress has raised the debt ceiling
four times in the past two years and will probably have to do it
again in the next month.
With the government borrowing record amounts of money, the
nation's current debt ceiling of $12.1 trillion will be pierced
soon.
That ceiling is the cap on how much the country allows itself to
have in debt. In credit card parlance, the ceiling is the U.S.
credit limit. At the end of August, U.S. debt totaled $11.8
trillion. That's roughly $349 billion shy of the statutory
limit.
The ceiling is meant to serve as a brake on spending because
lawmakers would have to think very seriously before they breach the
limit and take a very difficult political vote to do so. In
reality, lawmakers really don't have a choice but to raise the
ceiling and they know it.
Put simply, if they don't raise the ceiling, the country will go
into default on its debt. The domino effect would be painful, to
say the least.
Treasury bonds would come due but the Treasury wouldn't have the
authority to borrow more money to pay holders of those
securities.
The government might be able to come up with some cash by, for
instance, borrowing from the federal employee retirement trust
fund.
The Treasury Department also said Wednesday that it was taking
steps to "preserve flexibility" in how it manages its debt. It will
reduce the amount of money in its financial rescue reserve --
essentially setting aside cash in the event that lawmakers don't
raise the ceiling in a timely manner.
But such measures can only stave off the inevitable temporarily.
After Treasury exhausts its options, barring an increase in the
ceiling, the value of U.S. bonds, would sink, jeopardizing the
portfolios of countries and investors around the world who invest
in U.S. debt.
"Our credit as a nation would plummet immediately and throw the
world economy into a depression," said Charles Konigsberg, chief
budget counsel for The Concord Coalition, a deficit watchdog
group.
The debt ceiling was implemented decades ago. Lawmakers have
raised it 90 times in the past 69 years, according to data from the
Office of Management and Budget.
Earlier this year, the House passed a joint resolution that
would raise the debt ceiling to $13.029 trillion for fiscal year
2010. The Senate has yet to weigh in.
While lawmakers are almost certain to support an increase, the
issue is expected to spark a firestorm on the House and Senate
floors.
That's because the statutory debt limit is more of a political
hammer used most often by whichever party is in the minority to
blame the majority for the soaring debt. Konigsberg said he expects
the debates in all likelihood to be "0% substance and 100%
politics. It comes down to two parties arguing about who's
responsible for the debt."
But one quid pro quo that fiscal conservatives might propose is
an amendment to create a deficit reduction commission, which is an
idea that could generate bipartisan support, he said.
In any case, the debates over the debt ceiling may be
particularly heated because of the unprecedented government
interventions that were launched in the past 18 months to curtail
the financial and economic crises.
