Washington D.C. has done it again.

After enduring an embarrassing month-long government shutdown this past fall, it seemed that Congress was beginning to act responsibly in relation to the U.S. debt ceiling. Passing the Continuing Appropriations Act, the U.S. government was able to continue borrowing money to fund itself until Jan. 15.

Unfortunately, that is well past. With the second provision of the act, suspending the debt ceiling until Feb. 7 ending last week, Congress has gone back to pointing fingers at each other while the full faith and credit of the U.S. hangs in the balance.


What is the debt ceiling?

Used by the government to limit the amount of debt that can be issued by the U.S. Treasury Department, the debt ceiling is a calculated figure that takes into account all publicly held debt as well as any intra-governmental account debt. While this is not an expression of how much money the U.S. government can borrow, the ceiling does mark an arbitrary limit past which the U.S. Treasury cannot finance new debt.

Should this ceiling be exceeded and no extraordinary measure be enacted to either raise the ceiling further or finance previously taken debt, the U.S. would be forced to default on some of the debt. Manifesting in unpaid wages and lost revenue, this may seem as an acceptable solution to some, but it would be far less palatable to the immediately affected. Any default would have incredible consequences for a world economy already reeling from Asian market instability.

If nothing is done...

Treasury Secretary Jack Lew notes that if no resolution is reached, the U.S. Treasury would be forced to pay its debts with on-hand assets plus any new revenue gained day-to-day. Given that he expects on-hand assets to be no more than $50 billion and that daily expenditures can be as high as $60 billion, the government seems primed for a minor meltdown.

If a default does occur, the U.S. has few choices, none of which would be popular. Another more severe government shutdown could occur, delaying federal services at an extremely inopportune time. The government could attempt to bring more revenue streams in and raise taxes. This is a politician's worst nightmare for obvious reasons. Finally, the government could default on portions on internationally held debt, which would extremely hurt the credit rating of the U.S. (currently at AAA). This would hamper U.S. investments in the long term as other countries could be reticent about the precedent any default might set.

If something is done...

The question is what to do. Given the misconception of what the debt ceiling does, increases in the debt ceiling are unpopular with voters, leading any potential increase to be about as likely as spotting the Loch Ness monster in the Hudson River. 

The U.S. Treasury can also exchange on-hand securities for non-Treasury based securities, which has been done before in 1985. This measure is a stop-gap at best, and only diffuses risk more widely; any default that comes after this would affect more economic actors than if debt were held only by the U.S. government.

Finally, and most likely, the government can suspend the debt ceiling until a later date. Given that this allows for the proverbial can to be kicked down the road for someone else to deal with, this is a win for politicians and a loss for nearly everyone else. 

While this will be worse later, at least both Congressional parties are finally waking up. Republican House Speaker John Boehner has made it clear several times recently that default "is not an option." Democratic leadership has been somewhat quiet in remarking on the current situation, but have been releasing signs that they are open to discussion. 

The verdict? Something will be done, though it may not be an increase in the debt ceiling. While something is better than nothing, it may be time for the American public to encourage an increase in the debt ceiling or a realistic discussion on financial costs in the economy today.

In the end, while the U.S. has a AAA credit rating, it may not be the best time to invest in the U.S. government.

The article Will the U.S. Finally Raise the Debt Ceiling? originally appeared on Fool.com.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Forex for Beginners

Learn about trading currencies and foreign exchange transactions

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum