Debt Ceiling or Spending Limit?

We’re seeing a lot of debate in Washington about what is commonly referred to as the "national debt ceiling." This post is an attempt to shed some light – and provide some good resources for further information – on what this really means. National debt is not the total future obligations of the federal government to pay. It is basically all the public debt (like Treasury bills) plus money we owe to other governments – in other words this ceiling only puts a limit on how much the federal government can borrow, not on how much they can spend.

The national debt number is available "to the penny" at the Treasury Direct website. There are only a few categories of debt that are not subject to the limit, mostly having to do with the way that Treasury Bills are issued to pay all the interest up front (discounted) and the way that payment is handled in accounting terms. Raising the National Debt Ceiling involves raising the limit on the public debt ceiling.

There is a bigger number that most other countries use to define “debt”. The official definition for “debt” used in the European Union, for example, includes obligations to Social Security, Medicare, etc. at the national level, plus regional and local government debt. (Thanks to Yannick for initiating a discussion of the distinction with his comment to my 2009 piece on Public Debt Crisis.) In the U.S., the larger number is usually referred to as "total indebtedness". There is no limit set on the promises of the US government to spend money -- for example, the almost $13 trillion committed to the post-crisis bailouts and stimulus was not subject to the debt limit despite that number being almost equal to the total national debt. The limit only applies to how much the Treasury can borrow to meet its obligations. So if the question is “should the ceiling be raised?” then my answer is “it doesn't really matter.” Congress can keep spending without it.

When politicians say they are against raising the debt ceiling it’s usually referred to as “Grandstanding” – which Merriam-Webster explains is to act so as to impress onlookers.

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After a last-minute deal in

After a last-minute deal in April averted a government shutdown, Republicans focused on the need to raise the debt limit, making it clear that they would not approve an increase without at least $2 trillion in spending cuts.

If the current $14.29 trillion debt ceiling is not raised, the Obama administration says the government would ultimately have to default on its debt; without borrowing, it would not be able to pay both the government's daily bills and the investors whose bonds have come due.

Update June 2, 2011

This article from The Guardian sums up the situation pretty well. Congress has raised the debt ceiling 74 times since 1962. In an effort to force the issue, my friend and yours Timmy Geithner is robbing Peter to pay Paul: he is taking money from public pension funds which he swears he will pay back after Congress gives him more money to play with.

In fact, President Obama is being misled by his advisors. Rather than losing faith in the US Treasury, investors are flocking to it. The latest offering was, as usual, over-subscribed. More people want to buy Treasuries than the Treasury can sell.


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