Crisis Averted: Debt Ceiling Raised Early Wednesday Morning

"The United States Capitol in Washington DC, USA.
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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. 

See: Senate Democrats To Vote on Raising Debt Ceiling Today — One Day Before Deadline
Find: Why the Debt Ceiling Is Always Up for Debate

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.

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See: Fed Likely To Hike Interest Rates in June 2022 To Combat Spiking Inflation
Find: New Bill Proposes Ways To Eliminate Debt Ceiling Issues in the Future

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.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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