The term debt ceiling refers to the maximum borrowing power of a government i.e. country. For many this is an abstract concept which does not resonate as the serious and pressing matter that it is. Essentially when the Federal Government experience large deficits through spending more than it is taking in (through taxation), then it must be financed by debt. In other words the government, like you or I, needs to borrow money from time to time in order to finance its various projects – cleaning up the schools or the streets, or implementing new programmes meant to raise money. However if the government is unable to issue more debt or to borrow more money then this means that it has hit the debt ceiling, and that in turn means it can’t go ahead with the various expenditures. If the debt ceiling can’t be extended and the government can’t cut spending to lower the deficit, then it will.
Of course part of the question here is – where does the government get this money and who is doing the lending? And how high exactly is this debt ceiling?
Well the answer is that there are many lenders and many sources for America to get loans. Often this means other countries – the US for instance borrows a lot of money from China. Other financers include Russia, Japan, Britain, Luxembourg, Hong Kong, Switzerland and many more. There are many other investors as well however, and they include wealthy individuals within the country and organizations who can buy treasury bills/bonds. Here investors buy the bills when the interest rate offered is high enough that it offsets the potential risk. This is considered one of the safest investments. In the UK bonds are sold similarly to this which pay out at 5% per year for 10 years before the investor gets the full value of the bond back.
Theoretically the government could keep issuing treasury bills and keep borrowing from other countries and that way finance all of their projects without decreasing the deficit. However the danger of increasing the debt ceiling of course is that when the debt matures (T-bills for instance have a maturation date of one year or less in general) the government will be obligated to pay back its obligations and this can damage the economy severely. At the same time some argue that the debt ceiling helps to encourage more efficient spending cuts. The debt ceiling then is ‘self imposed’ and is currently set at $14.294 trillion; though debate is constantly raging as to whether and when this number should be increased.