Mellody Hobson explains the debt ceiling in today’s “Money Mondays” segment.
Let’s start at the beginning. A common misperception is that the debt ceiling is the amount of money the government owes, and that raising the ceiling means increasing the federal debt. The federal debt is what it is…$16.76 trillion as of September 30th, according to the Treasury department. By contrast, the debt ceiling is the amount of money the government can borrow in order to pay that debt. That limit is currently $16.7 trillion, although technically the government already exceeded it in May. So the debt and the debt ceiling are different, but raising the amount the government is allowed to borrow will of course end up allowing the country to go deeper into debt, at least temporarily.
How is that money “borrowed” by the government and from whom are they borrowing?
You and me! And other people and countries all over the globe. Plus, in recent years, the Federal Reserve has emerged as a major buyer. The U.S. government borrows money by selling Treasury Bonds…and it uses the money it makes from selling those bonds to pay off existing debt and borrow additional money.
Should the government just cut federal spending?
That’s logical but could be disastrous right now because the economy is still recovering. According to the Congressional Research Service, cutting federal expenditures would mean discretionary spending would be drastically reduced—that includes defense, education and housing. Social Security would be threatened, taxes would need to rise and the economy would likely go into recession as a result. So a meaningful cut in spending is not a good option at this time.