Crisis Averted: Debt Ceiling Raised Early Wednesday Morning

"The United States Capitol in Washington DC, USA.
code6d / Getty Images

Early in the morning of Wednesday, Dec. 15, the House passed legislation to raise the federal debt ceiling by $2.5 trillion, officially sending the bill to President Joe Biden for final signature. 

On Tuesday, Dec. 14, the bill barely passed the Senate with a 50-49 vote. Both chambers approved the measure just ahead of the Treasury Department’s Dec. 15 deadline to extend the country’s borrowing limit — a ceiling that Treasury Secretary Yellen stated had the potential to set the country into economic turmoil if not raised. 

The agreement allows the United States to pay off its prior debts. After an unprecedented year of government spending, which included several stimulus checks and federally sponsored unemployment supplements, the government needed to find a way to pay its receipts.

This is not the first time the govenrment was in risk of default, as political infighting has led to similar tensions several times throughout recent history. The threat of recession, particualrly at a time where the economy is still puttering along on its way to full liftoff post-pandemic, typically allows for an increase in the amount of debt the government can take out.

Raising the debt limit does not necessarily add to the the national debt but instead allows the government to pay back old loans it took out. This is why the risk of “default” was floated around for the last several months. It would have been similar to a consumer defaulting on their home or car loan. But whereas for a consumer, the bank sets the limit on how much you can borrow, the government sets limits for itself. Since there are already large loans taken out by the government, the government essentially needs to take out more debt to pay off old debt. Think of it like paying off one credit card with another — the debt simply carries over as you have increased your own “debt ceiling” by increasing the amount of credit (i.e. debt) you can have at one time.

Make Your Money Work for You

More From GOBankingRates


See Today's Best
Banking Offers