The U.S. debt ceiling explained

Jul 11, 2011

As many political pundits predicted, the debate over the federal debt ceiling is reaching a new level.

President Obama said in a news conference today that if Republicans refuse to budge in budget negotiations, then a debt ceiling deal probably won't be reached.

House Speaker John Boehner responded that it takes "two to tango" and the President, according to them, isn't dancing the way they'd like.

So, with the August 2nd deadline approaching fast, it seems like were going to DEFCON 3 or 4 on this one.

In case you're sitting this news story out because you just don't understand what the heck a debt ceiling is. Here's a great info-graphic from mint.com. It helps explain what's at stake.

For instance, in the info-graphic we see that the Treasury Department says if no deal is reached by August 2nd, the following payments on U.S. obligations would be canceled or delayed:

  • ┬áSocial Security and Medicare benefits
  • Veteran's benefits
  • Federal worker salaries and retirement benefits
  • Corporate and individual tax refunds
  • Unemployment benefits to states
  • Defense vendor payments
  • Interest and principal payments on Treasury bonds and other securities
  • Student loan payments
  • Medicaid payments to states
  • Day-to-day operations payments to keep government facilities open
  • Military salaries and retirement benefits

Basically, the government shuts down. It'll be like Minnesota on steroids.

If you want day-to-day updates on this game of chicken with the U.S. debt ceiling, you can check out this updating post from Mother Jones.

So far the world's financial markets see the debt ceiling debate in Washington as political theater, but that could change if people start to seriously think that the U.S. won't raise the ceiling.

The Washington Post highlights five tell-tale signs that the markets "are losing faith in the U.S. political system." I list them here without their detailed explanations:

  1. Discontinuities in the Treasury bill market
  2. A narrower spread between rates on Treasury bills and other forms of short-term credit
  3. Spikes in the credit default swaps market
  4. Higher volatility
  5. A narrower spread between Treasuries and near substitutes

So was there ever a time when the nation was debt free? According to NPR's Planet Money, there was one year, 1835:

On Jan. 8, 1835, all the big political names in Washington gathered to celebrate what President Andrew Jackson had just accomplished. A senator rose to make the big announcement: "Gentlemen ... the national debt ... is PAID."

That was the one time in U.S. history when the country was debt free. It lasted exactly one year.

Here's that story: