The US debt ceiling in a nutshell
I just want you to know that I would rather be doing anything, anything at all, rather than thinking about the debt ceiling again.
That makes two of us. Actually, it makes millions of us, according to a CNN poll this week. No one wants to be here.
Let's just do this.
Okay, I just mean I feel like we just did this a few months ago.
Yes. Earlier this year, the debt ceiling crisis was wrapped up in the "fiscal cliff". We also did it in 2011. Yet here we are. Again. For the third time.
Sorry, I feel sheepish about this but what's the debt ceiling?
Don't feel sheepish. In a just world, we shouldn't even be thinking about it this much. The debt ceiling is the borrowing limit that the United States Congress sets for itself. Right now, it's at about $16.94-trillion. It's designed so that Congress doesn't recklessly spend more money than is responsible. Congress spends pretty speedily, so the debt limit usually comes up for a vote every year. Most years, it passes easily, but it hasn't been easy since 2011. Debt is really important to the US government. It funds itself in two ways: one is through taxes from people and companies. The other is by borrowing money, which the government does by issuing treasury bonds. When someone buys a treasury bond, they are lending the government money, and the government pays them interest every month. Those interest payments are huge; the next one is about $13-billion, due on October 17. The November payment is about $25-billion.
So, wait, $17-trillion is 'responsible spending'?
Just go with it.
Right. So. If I understand this correctly, raising the ceiling means allowing Congress to borrow more money to pay bills?
It means two things. One is, yes, that Congress can borrow more money next year. The second thing is more important: raising the debt ceiling also means that the US treasury, the national piggy bank, can pay the bills Congress has already run up this year. Congress has already authorised more spending than the debt ceiling allows.
So the same Congress that spent money is now arguing about whether to pay its own bills.
What kind of bills does Congress run up? Is it all fur coats and bad music?
No. There's everything in the budget, of course, like the national parks and scientific research and food inspection and all those important things. Then there are things that affect everyday life, like social security and retirement benefits for government workers and pay for the military. The treasury also has to pay interest on all those government bonds that people buy. Some big payments are coming up, like social security payments of roughly $12-billion on October 9, 16 and 23. Overall, the treasury needs to make payments of about $108-billion between mid-October and mid-November.
That sounds pretty bad. What happens if we don't pay our bills?
If we don't pay our bills, then the US defaults on its debt.
What's a default?
A default, technically, is a failure to make a payment on your debt. It works roughly the same way that not paying your bills will lower your credit score and increase your interest payments on your credit card. If the US government doesn't pay its bills, it will have to pay higher interest when it borrows money – which is really bad because the US government exists by borrowing trillions of dollars. The US has an almost perfect credit score right now, and very low borrowing costs. It would be really stupid to ruin that.
Has it ever defaulted before?
Not in the modern era, at least not on purpose. But yes, there have been defaults. They were never a good thing.
How would a default hurt the US?
It could hurt the economy, because companies and stock markets depend on the idea that the US is not reckless with its finances. The US dollar is the reserve, or reference, currency for the world. So far, the stock markets have been very calm.
There's a government shutdown too. I've avoided reading anything about this in the hopes that it would go away before I have to delve into it. What's going on?
Let me explain – no, there's too much. Let me sum up. Many of the same Republicans who wanted cuts to social security and Medicare last year dislike the president's healthcare reform plan, the Affordable Care Act, which is known as Obamacare. They want the president to limit or reduce the healthcare requirements.
Isn't the Affordable Care Act already law?
Didn't the Affordable Care Act get challenged in the Supreme Court last year, and then was found to be constitutional?
Do all Republicans hate the Affordable Care Act?
No. Some Republican governors have come around to embracing it.
Maybe the lawmakers are thinking of votes. Is opposing the Affordable Care Act and forcing a shutdown a popular idea?
No, the majority of Americans oppose a shutdown to change the Act and blame Republicans for it.
So maybe the Republicans shutting down the government think it will get them more money from powerful donors?
No, powerful Republican donors are annoyed and withholding money, according to one press report.
So – what are we doing here?
On October 1, the healthcare exchanges from Obamacare went live at healthcare.gov. Republican opponents were hoping to stop that from happening. They say Obamacare is "not ready for prime time", in the words of Eric Cantor, the House majority leader. So they forced a shutdown until the president negotiates with them. The president has refused to negotiate about changing something that's already in the law.
Like a ransom?
For criminals, it's called a "ransom". For congress, it's called "leverage in a negotiation".
Okay, fine, the president calls it a "ransom". He has also suggested that the Republican opponents are being petulant because he won the 2012 election instead of Mitt Romney.
What do the Republicans call it?
John Boehner, the House speaker, said "it's not a damn game".
So what does the shutdown have to do with the debt ceiling?
They're related by the thread of chaos. If Republicans are willing to shut down the government, the president suspects they may also be of the mind to refuse to raise the debt ceiling. Boehner has said he would not allow the US to default. More recently, he backtracked and suggested Republicans would allow the US to default if the president didn't open negotiations on the Act.
So what happens next?
It's an impasse. President Barack Obama and Republican leaders have to figure out how to end the shutdown and raise the debt ceiling. That means talking to each other. Based on the past, we have every reason to be optimistic, obviously. – © Guardian News & Media 2013