National Debt…and its Ceiling

With news outlets covering the pending breach of our nation’s debt limit over the past several weeks, I’m sure that many, if not most, people really don’t understand the difference between a national deficit, national debt, the national debt ceiling, and what they all mean to us citizens of the U.S. So I set out to find a written explanation of what they all mean, and I found a concise, yet complete, answer here on Investopedia: 

For those who are just looking for the Cliff’s notes version, here you go:

  • A budget deficit occurs when expenses exceed revenue during one budget cycle. This can indicate the financial health of a country. Accrued deficits form our national debt.
  • When spending more than it earns, the U.S. Treasury Department must issue Treasury bills, notes, and bonds. These Treasury products finance the deficit by borrowing from the investors.
  • The national debt is simply the net accumulation of the federal government’s annual budget deficits.
  • The total amount of money that can be borrowed by the government without further authorization by Congress is known as the “debt limit.” Any amount to be borrowed above this level has to receive additional approval from the legislative branch.
  • Finally, the national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt, or outright default.

In a similar manner, family households in the US can also spend more than the household brings in. And similarly, this causes debt, and debt requires servicing by paying an interest rate. A household could go on indefinitely servicing/carrying this debt, spend less and pay a portion of the debt off, refinance the debt (i.e. roll into a mortgage payment, find a lower interest rate loan), sell off assets to pay the debt off, or even default on it (aka bankruptcy).

The major difference here, and what is happening right now, is that unlike the US government’s request to just increase the debt limit, your lenders wouldn’t necessarily be lining up to extend even more credit and credit lines to your household once you’ve maxed out your current credit limits. That would be too risky on their behalf.

So while you listen to both sides of the aisle (of congress), presidents and CEOs of banks, and other economists throw in their beliefs and theories on this current event, make yourself informed enough to understand the whys, whats, causes, and potential solutions to the current budgetary debt issue at hand.

Again, here’s a fantastic link to answer any question you have about our “U.S. national debt.”