10 Things Most People Don't Know About The Debt Ceiling

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Jim Probasco, Benzinga Staff Writer

With the Senate's recent approval of the House-passed clean debt limit legislation, now might be a good time to define the debt ceiling (aka “debt limit”).

The U.S. Treasury defines the debt limit as “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”

Knowing the definition and truly understanding the debt ceiling are not synonymous. To that end, here are some things many citizens do not know about this widely discussed topic.

Raising the Debt Ceiling Does Not Allow for New Spending

One of the most widely misunderstood constraints of the debt ceiling is that, whatever that amount of money is, it cannot be used to borrow funds to pay for new debt not already approved by the government.

The debt ceiling only authorizes the government to borrow in order to pay for obligations it has already taken on.

Raising the Debt Ceiling Isn’t the Only Way to Pay Our Bills

Although the subject is controversial, most people believe we have to raise the debt ceiling or risk defaulting on already accumulated debt, thereby risking setting off a chain of events that would be catastrophic for our country.

Some, including Sen. Rand Paul, have said the country would not go into default since it collects enough to pay interest on debt on an ongoing basis.

Instead of borrowing, Congress could raise money to pay our bills by increasing taxes, selling assets, or even prioritizing or eliminating some discretionary spending, according to CNBC. It’s all about choices, and these choices are not easy to make. Raising the debt ceiling simply becomes the easiest way to solve the problem.

Our Government Owes a Lot of Money to Itself

More than 28 percent of the debt already incurred by the U.S. Government is owed to the U.S. Government, according to the Pew Research Institute. About 16.5 percent of that is owed to Social Security. Another 12.4 percent is owed to the Federal Reserve.

China Does Not Own Us

Speaking of creditors, many people believe we owe a huge amount of our debt to China and that, every time we raise the debt ceiling, most of that money goes there. Pew Research reported China actually only owns about 7.6 percent of the U.S. total debt obligation.

The Debt Ceiling is Not a Relatively New Phenomenon

In fact, a legally imposed debt ceiling has been around in the U.S. since 1917. Furthermore, the U.S. has been in debt every year of the country’s existence, except 1835, according to the Independent Voter Network.

The “Gephardt Rule” Made Raising the Debt Ceiling Automatic

Not many people even know about the so-called “Gephardt Rule,” named after former House Majority Leader, Dick Gephardt. According to IVN, it was a parliamentary rule imposed by Gephardt in 1979 that deemed the debt ceiling raised when a budget was passed. Congress repealed the rule in 1995.

The $1 Trillion Platinum “Coin” Was Never a Viable Option

At one point, a novel solution to the debt-ceiling problem was suggested -- in which the Treasury would mint a $1 trillion platinum coin, which it would deposit with the Federal Reserve, giving the government a bunch of money with which to work.

The problem is that neither the Treasury nor the Federal Reserve ever considered this option viable. The Federal Reserve would almost certainly not recognize the coin, and all would have been for naught.

The 14th Amendment is Different From the “Coin” But Still Not a Good Option

During the last debt ceiling crisis many people heard about the 14th Amendment at the same time they heard talk about the so-called trillion dollar platinum coin and, understandably, conflated the two.

The 14th Amendment to the Constitution says “The validity of the public debt of the United States, authorized by law ... shall not be questioned." Some experts feel that gives the President the right to direct the Treasury to “pay our bills” without action from Congress. This is different from the notion of a platinum coin, but, for many of the same reasons, not a good option.

The Debt Ceiling And a Government Shutdown Are Not Related

Strangely, many people tied a potential government shutdown, such as the one we had in Oct. 2013, to raising the debt ceiling. There is no real connection –- other than timing.

The shutdown occurred because Congress failed to pass legislation funding ongoing government operations, while the debt ceiling relates to “paying bills” we already owe.

Sometimes the Debt Ceiling Has No “Ceiling”

The use of the terms “ceiling” or “limit” imply a dollar amount over which government spending can’t go.

Sometimes -- and this most recent debt ceiling crisis is one of those times -- Congress considers legislation that places no borrowing limit in dollars, but merely has a time limit.

The bill just passed by Congress has no dollar limit. Instead it expires March 15, 2015.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , US Markets , Banking and Loans , Economy

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