Hitting the Ceiling

The big story in Washington these days is the negotiation over the federal debt ceiling. Our national debt currently stands at just over $14 trillion, which puts it at the legal limit that was established by Congress in February 2010. Sometime very early next month, the debt is projected to exceed that limit, for the first time in American history. At that point, we can either raise the debt ceiling, or run the risk of default.

It’s important to understand what exceeding the debt ceiling would not mean. It wouldn’t mean a government shutdown, or that the government had to stop spending money. After all, revenues would still come in via taxes, so there would be new money for the feds to spend. It would not even mean an immediate default on our debt. One way to avoid that is if the government prioritized its spending. There wouldn’t be enough assets for it to pay all its obligations, but it could tell, say, defense contractors that they wouldn’t be receiving their payments until the crisis was resolved.

What would trigger the default is if the government stopped paying interest on the debt. That has to be given first priority, which is why the cuts to actual spending would be so draconian. To stay under the current debt ceiling, government spending would need to drop by around 40 percent. That's why the stakes have been so high, for both sides.