United States Debt Limit - Explained - YouTube

Imagine living in a United States that could not  pay its debts. Who do you think would suffer most  

from this? The answer might surprise you. At first  you may think, well, if the United States couldn’t  

pay all of its bills, they would definitely  take care of their citizens first. But are you  

absolutely sure about that? Would the people in  power be willing to lose billions of dollars just  

to keep the average citizen happy? Deep down  you probably aren’t so sure which bills the  

United States government would prioritize to pay.  Let’s take a look at what the U.S. debt limit is,  

and what may happen if the government ever  exceeds it. We’re warning you ahead of time,  

the end result will not be pretty,  and could change the world forever.

Simply explained, the debt limit, also called the  debt ceiling, is how much money the government  

is allowed to borrow to pay its bills. As  the only current superpower in the world,  

the United States has a lot of bills to pay each  year. They cover things like Social Security,  

Medicare benefits, military salaries,  interest on the national debt, tax refunds,  

and other payments. The reason that the United  States government needs to borrow money from the  

Treasury each year, is because the revenue  coming in through taxes and investments,  

is less than how much money the government owes to  people both domestically and in foreign countries.

At this point you may be thinking, “well  that’s weird. If I don’t have enough money  

to pay my bills, I’m screwed, but somehow the  United States government has not been able to  

pay its bills for over 100 years and they  seem to be doing fine.” You would be right  

to be confused by this. As an individual,  you can’t just decide each year to borrow  

more and more money to pay for the bills that  have accumulated. If you do try and do this,  

you either go bankrupt or end up in jail. So,  how does the United States government do it?

As of the last debt limit raise in 2019,  the United States debt ceiling is just under  

22 trillion dollars. It is important to make the  distinction between the debt limit and the budget.  

The budget is how much money the government plans  to spend each year, while the debt limit is the  

amount of money the government can borrow to pay  bills that already exist. Raising the debt limit  

does not increase government spending. Raising  the budget on the other hand, absolutely does  

increase government spending. You can think of the  debt limit as borrowed money to make sure that the  

United States government has the cash it needs  to meet all of its financial obligations.

You might be wondering how this all started. When  did the United States government decide it would  

borrow more than it could pay back each year? The  debt limit started in 1917 as the U.S. entered  

World War I. The Treasury recommended a law that  would allow the government to issue war bonds.  

This would bring in more money to finance the war  effort. The Treasury made it clear that only a  

certain amount of bonds could be sold, since the  government would eventually have to pay the bonds  

back with interest. The very first debt limit  for the United States was set at 11.5 billion  

dollars. That is a lot less than the current  debt limit, and we aren’t even in a World War.

It has never happened before, but let’s look  at a hypothetical situation where the United  

States government hits the debt ceiling  and is unable to pay all of its bills.  

At first things might seem okay, but they  can go bad really quickly. You won’t believe  

the lengths that the government will go to,  to ensure they don’t reach the debt limit.

As the government gets closer and closer to  the debt ceiling, the Treasury steps in to  

enact what are called “extraordinary measures.”  These decisions are used to slow the impending  

financial crisis. One of the quickest ways  for the government to get its hands on cash,  

is to suspend daily reinvestment of government  funds. As the federal government sets up funds,  

such as for retirement plans, currency exchange,  or government transactions, it invests a portion  

of those funds in Treasury securities that  mature. If done properly, the securities  

create monetary interest for the funds. However,  by reinvesting these securities on a daily basis,  

the government does not have immediate access  to any of the money tied up in securities.  

Therefore, if extraordinary measures need to  be taken, the government will stop reinvesting  

and just use the cash from expired securities to  pay off debt. This creates a pool of money that  

is immediately available, but stops the growth  of any fund that the securities are pulled from.

Think of it this way. You work for the federal  government and have been paying into a retirement  

plan. Everything is great, because your retirement  fund is growing due to the investments by the  

government. Then suddenly the government gets  dangerously close to hitting the debt ceiling.  

They start pulling investments from your  retirement fund, and the growth of the fund begins  

to slow, or even stops temporarily. The government  will return the funds with interest when it can,  

hopefully you weren’t planning to retire any  time soon, otherwise you could lose a lot  

of money. But hey, at least the federal  government didn’t default on its debts.

There are other emergency measures  that the government has in place  

to mitigate reaching the debt limit.  These include suspending pension funds,  

pausing state and local government securities,  

or borrowing money that is intentionally put  aside to manage exchange rate fluctuations. None  

of these are good options, but it’s better than  what could happen if the debt limit is reached.

Now let’s imagine the unthinkable happens.  The United States needs more money than it can  

borrow. Things are about to get really scary,  so you might want to prepare yourself. If the  

debt limit is reached, it means the Treasury has  run out of cash, and it cannot borrow any more.  

Every day the Treasury collects money from taxes  and loans owed to the government. It then uses  

the money coming in to pay its own bills. If the  government's bills exceed the money coming in, and  

the government has no money left to borrow, the  game is over. The government has to start deciding  

which bills to pay, and which to push off until  later. This is where things get really dicey.

Programs that are important to you like pensions,  social services, and military veterans’ benefits,  

might not be the same as what  the government sees as important.  

This could cause serious contention between  the government and the citizens of the United  

States. In fact, we guarantee that the  government’s idea of what bills to pay,  

would not be the same as the programs just  mentioned. A released transcript from an  

August 2011 Federal Open Market Committee meeting  revealed something startling. The officials at  

the Treasury and the Federal Reserve planned to  prioritize interest payments on the federal debt,  

over government programs if Congress did not  raise the debt ceiling. This means that the  

government would stop paying social services,  to ensure there was enough money to make  

interest payments to other countries and Treasury  security holders. This seems a little messed up.

We are not arguing that those debts should  not be paid. There would be huge negative  

ramifications for not paying off debt with high  interest rates, but is it worth defaulting on  

obligations to the country’s citizens? Everyone  will have their own opinion on the matter,  

but it does make you think. The objective of the  2011 decisions was to make sure investors still  

had some faith in Treasury bonds and securities.  If the public lost faith in the Treasury, it would  

make it much more difficult in the future for the  government to find buyers to purchase securities.  

This could lead to companies and corporations  losing faith in the United States government,  

and moving their operations elsewhere.  All of these things together could lead  

to an economic collapse, which inevitably  would be bad for everyone around the world.

On top of these problems, if the debt ceiling  was reached and people around the world started  

to lose faith in the U.S. Treasury, then interest  rates on all loans could go up. That would mean  

car loans, credit cards, mortgages, and student  loans would all increase their interest rates.  

This snowball effect would lead to a recession,  but more likely a depression reminiscent of the  

1920’s and 30’s. Needless to say, it is vital that  the United States does not reach its debt limit.

We can see the ramifications of the United  States reaching its debt limit and not being  

able to pay its bills, yet, raising the  debt limit can be very controversial.  

Why would something that could lead  to economic collapse if not raised be  

controversial? There is no way anyone  could want the alternative… is there?

Over the years some legislators have argued  that by refusing to raise the debt ceiling,  

government spending would be reduced. This  is unnerving for two reasons. Firstly,  

because if the U.S. does not raise the debt  ceiling it could lead to economic collapse.  

Secondly, because the debt limit has no impact on  government spending at all. As mentioned before,  

government spending is determined by the federal  budget, not the debt limit. Which makes us wonder  

how competent these politicians are, if they  don’t understand this basic difference between  

the federal budget and debt limit. It’s  a little frightening when you think about  

it. These are the people making decisions for  the most powerful country in the entire world.

Other politicians use the debt limit to  their own advantage in a more devious way.  

Their vote to raise the debt limit is sometimes  used as a bargaining chip. These politicians  

refuse to vote on the increase, unless their  other demands are met. Most of the time this  

has to do with reducing government spending  through budget cuts, but politicians also may  

refuse to sign on until they gain support for an  unrelated bill. Politics are a nasty business.

Other politicians, as well as a number of former  Treasury secretaries from both the Democrat and  

Republican parties, believe that in order to keep  up with the fluctuations of the world economy,  

the debt limit should be raised every year.  Others believe that there should be no limit to  

the amount of money the United States government  can borrow. Again, these people are not arguing  

that the United States should be spending more  money. They are arguing that the consequences  

of reaching the debt limit, and not being able  to pay the United States’ bills, is too much of  

a risk to leave to cranky politicians with their  own agendas. Instead, if there were no debt limit,  

then there would be no chance of the United States  defaulting on its monetary obligations. Government  

spending can still be reduced through a well  throughout budget, even if there is no debt limit.

It is important to note that as politicians debate  passing debt limit increases, people in the United  

States and around the world get nervous, and  start dumping their Treasury securities. This  

is exactly what the Treasury is trying to avoid,  yet as politicians squabble, it happens anyways  

due to the lack of confidence in the decision  making process. This lack of confidence then  

manifests itself in the stock market and other  sectors, which in turn hurts the economy anyways.

So, should the debt limit  be increased? Absolutely,  

as long as the United States has bills to  pay, it needs money from the Treasury. The  

alternative where the United States is unable  to pay its debt, is a scary scenario. However,  

a different question is; should the United States  continue to spend money at its current rate,  

so that it needs to keep raising the debt limit?  That is up for debate. There could be budget cuts  

to parts of the government. Does the United States  need to spend 732 billion dollars each year on  

its military, which is more than the next top 10  military budgets from around the world combined?  

Perhaps. Does the United States government need  to give multi-million dollar companies tax breaks  

that allow them to pay next to nothing  to the federal government? Probably not.

It might be worth knowing where the politicians  you vote for stand on raising the debt limit,  

or at the very least which programs they want to  fund. Either way, now you understand that the debt  

limit is how much the United States government  can borrow to pay all of its bills, and although  

borrowing 22 trillion dollars seems like a lot,  not having the ability to pay is so much worse.

Now check out What If The US Paid Off Its Debt?  Or watch College Degrees That Earn The Most Money.