You probably are aware that the U.S. has reached its debt limit (roughly $31 trillion) again. The Treasury Department has borrowed as much as is allowed by the last debt ceiling measure passed by Congress—an amount that is entirely arbitrary. To avoid defaulting on the federal government’s obligations, Congress must raise the debt ceiling. This is nothing new; the U.S. has reached the debt ceiling some 80 times since 1960, and Congress has increased it every time.
The federal debt ceiling is nothing like a personal, corporate, or municipal debt limit. It is not, for example, like a mortgage lender evaluating your income and credit score to determine how much you can borrow to buy a house. As the US Treasury website explains, “The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.”
Congress has yet to raise the current debt ceiling. The Treasury has done some maneuvering to slow down payments it is obligated to make in what it deems to be inessential areas, like contributions to government employee retirement plans. If the showdown in Congress continues, Treasury will add more visible items to the list, like interest and principal payments to government bondholders, Social Security benefits, Medicare reimbursements, payments to federal contractors, and the salaries of federal employees. We probably won’t reach that point until sometime in the late spring, because current tax revenues help fund some of those obligations.
If the government becomes unable to pay interest on government bonds, the U.S. would be considered in default of its sovereign debt. At that time, the U.S. could no longer borrow money from individuals, corporations, or governments—including itself. Yes, about 35% of the U.S. debt is owed to itself.
This is another way that the federal debt ceiling differs from other debt limits which involve an inability to obtain new loans from other entities. No one but a government that issues its own currency can borrow money from itself.
The U.S. Treasury’s biggest lender is its central bank, the Federal Reserve Bank. Unlike every other bank, the Federal Reserve Bank has no shareholders. It is not owned by anyone. It derives its authority from Congress as the central bank of the U.S. government, and it is governed by an independent board whose members are appointed by the President and confirmed by the Senate for terms of 14 years. The bottom line is that the U.S. Treasury and the Federal Reserve are both controlled or governed by the U.S. Government.
Where does the Federal Reserve Bank get the money it can lend to the U.S. Treasury? Like every other central bank, it creates it. No other person, corporation, or government can create money, except the federal government.
This means the U.S. government can technically never run out of U.S. dollars to pay its bills. The Federal Reserve can create and loan to the Treasury all the money needed to cover the government’s obligations. The only thing that stops the Treasury from borrowing money from the Federal Reserve is the debt ceiling.
While other countries, including Poland and Germany, have a “debt brake” to keep debt under a certain percentage of the GDP, only the U.S. and Denmark have specified debt ceilings. Denmark’s, unlike that of the U.S., is set high enough to avoid the recurring need to increase it.
This may be a clue that the U.S. debt ceiling system is less than ideal. If the current Congressional brinksmanship continues until the U.S. is in default, the economic consequences—globally, nationally, and for individuals—will be severe.