U.S. Government Hits $14.3 Trillion Debt Ceiling

The Treasury Department has announced that the U.S. government hit the $14.3 trillion debt ceiling on Monday. Though the U.S. economy has hit the debt ceiling, it has not yet defaulted. However, it is expected to do so on Aug. 2, which gives lawmakers 11 weeks to set a plan in motion to avoid an ill fate.

Cutting Spending, Raising Taxes Considered to Avoid Default

If you are not familiar with the concept of the U.S. debt ceiling, it is a cap set by Congress on the amount of debt the government can legally borrow. The cap is on debt owed to the public (those who buy U.S. bonds) in addition to the debt owed to federal government trust funds, including Social Security and Medicare.

In this case, the government has borrowed enough money from creditors that now it has reached its debt ceiling of $14.298 trillion. The government has been trying to figure out how to avoid default for some time, and among the ideas are:

• Raising the debt ceiling: Lawmakers have discussed raising the debt ceiling, but many Republicans and some Democrats say they won’t agree to without an accompanying deal to cut spending.
• Increasing taxes: The Obama administration has made a strong push to raise taxes, especially for the wealthy, but Republican leaders are strongly opposed to tax increases and refuse to vote in its favor.
• Reforms: Lawmakers have also discussed the possibility of reforming some programs, like the pension program for federal workers.

As of Friday, lawmakers were still in the preliminary phases of a deficit-reduction agreement. As a result, Treasury Secretary is forced to do some legal loophole-jumping to avoid default, which he says he can do for approximately 11 weeks.

What Could Happen If the U.S. Defaults?

While the U.S. has reached the debt ceiling 74 times since March 1962, it rarely defaults because lawmakers are usually able to come to a consensus to avoid the consequences.

One repercussion of default includes soaring interest rates, which could make it harder for families and businesses to take out loans. Also, the value of U.S. Treasury securities, long known to be one of the world’s safest investments, would be in question, which could have a huge effect on loans and business deals that are based on this value.

Ultimately, the Obama administration says that a default would push the U.S. back into a financial crisis, which is why experts hope lawmakers will come to a consensus before the Aug. 2 default deadline.