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Debt limit Q&A: The United States reached its debt limit, what does that mean?

A default would have a “catastrophic economic impact,” Treasury Secretary Timothy Geithner says, which would include suspension of Social Security dispersal.

Associated Press

A default would have a “catastrophic economic impact,” Treasury Secretary Timothy Geithner says, which would include suspension of Social Security dispersal.

Treasury Secretary Timothy Geithner said Monday that he will immediately halt investments in two big government pension plans so the U.S. government can continue to borrow money. Geithner informed Congress of his decision in a letter stating that the government had officially reached its $14.3 trillion debt limit. He repeated a warning that if lawmakers do not increase the borrowing limit by Aug. 2, the government is at risk of an unprecedented default on its debt.

What is the debt limit?

The debt limit is the amount of money the federal government can borrow to help finance its operations. The latest estimate is that the government borrows 40 cents for every dollar it spends. Put another way, the government needs about $125 billion more a month than it takes in each month, according to the Washington Post.

Why does the United States have a debt limit?

The debt limit allows Congress to assert its constitutional authority to control spending. The limit also imposes a little fiscal responsibility by forcing Congress and the president to take visible action to allow further federal borrowing when the government spends more than it collects in revenues. In the words of one author, the debt limit "expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government."

What is the immediate impact of reaching the debt ceiling?

For now, the Wall Street Journal reports, government services will largely continue uninterrupted. However, the Treasury Department has started undertaking some technical, emergency steps to conserve cash so it can pay its bills and make payroll. It has stopped issuing certain debt for state and local governments and Monday it stopped those payments into the Civil Service Retirement system. (Federal employees and retirees shouldn't worry. By law, the funds must be made whole once lawmakers agree to increase the debt limit.) It can also redeem existing investment and stop reinvestment in the exchange stabilization fund, which buys and sells foreign currencies, according to the Journal.

Will that solve the problem?

No. These maneuvers will allow the Treasury to continue auctioning debt for another 11 weeks, until about Aug. 2.

What else can be done?

The government owns a lot of valuable stuff it could sell, according to the Journal, including about $400 billion in student loans, $375 billion in gold, and $142 billion in stakes of companies it rescued during the financial crisis. But the Treasury says selling off many of those assets would cost taxpayers money and could destabilize companies, markets and even the financial system. So Treasury officials have ruled this out as an option.

What happens after the Treasury exhausts all of its options?

If that happens, the Treasury is not authorized to issue new debt and could be forced to delay payments for government services or operations until funding is available and could eventually be forced to default on legal debt obligations, according to the Government Accountability Office.

Is that a big deal?

Yes, the federal government would be in default. Treasury Secretary Geithner has said a default would have a "catastrophic economic impact." He has said the government is likely to default on some of its obligations, which he said would cause enormous economic harm and the suspension of government services, including the dispersal of Social Security funds.

Even without a full-on default, the Wall Street Journal says, the additional uncertainty arising from the approach of the debt limit could drive the costs of government borrowing somewhat higher. That in turn could be harmful to the recovering economy because an increase in government borrowing costs would reverberate throughout the financial system, potentially raising the costs of borrowing for corporations as well. That would be another headwind for the economy as it continues to try to recover from the financial crisis.

But Congress always raises the limit, right?

Since 1940, the debt ceiling has been raised 80 separate times. The New York Times reports that Republicans in Congress, joined by a few Democrats, have said they will not vote for an increase unless Congress and the White House agree to cut about $2 trillion in projected spending for the next decade and to impose budget controls that will force additional trillions of dollars in savings. While the White House has criticized such threats to hold the debt limit hostage, given the global financial stakes, the administration is in negotiations with congressional leaders to reach a bipartisan budget deal.

Debt limit Q&A: The United States reached its debt limit, what does that mean? 05/16/11 [Last modified: Monday, May 16, 2011 10:14pm]
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