Welcome to our debt ceiling explainer. For a primer on the issue, read on. For the latest news, click here.
The Basics: On August 2 (or maybe a few weeks later), the US government will reach the legal limit on how much money it can borrow—a.k.a., the "debt ceiling." It's currently set at $14.3 trillion. The government borrows money to pay for everything from tax refunds to wars and veterans' benefits, not to mention repaying our creditors, which include China, Japan, the United Kingdom, state and local governments, pension funds, and investors in America and around the world.
A debt ceiling has existed since 1917. Before that, Congress had to provide its stamp of approval each time the Treasury Department wanted to sell US debt to raise money. (Here's a wonky history of the debt ceiling [PDF], courtesy of the Congressional Research Service.) Putting a borrowing limit in place gave the federal government more flexibility to fill its coffers without going to Congress over and over. Lawmakers in Congress have raised the debt ceiling on many occasions, including eight times in the past decade, and Treasury Secretary Tim Geithner has said that failing to raise it and allowing the US default "would shake the basic foundation of the entire global financial system."
What Happens If Congress Doesn't Raise the Debt Limit? In a word: Catastrophe.
At least that's what Geithner told Congress in January. In an ominous letter, he wrote that a US default would wreak havoc on the domestic economy and essentially result in a hefty tax on all Americans.
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