It's Back: Your Guide to the $18 Trillion Debt Ceiling

Bigger than U.S. GDP, the debt limit returns with plenty at stake

Deal Framework Reached on Raising U.S. Debt Ceiling
Photographer: Andrew Harrer

The cap on U.S. government borrowing kicks back into action Monday after Congress temporarily suspended it last year. The reinstatement means lawmakers in coming months must either lift or re-suspend the ceiling on the nation's debt, which exceeds the size of the economy and which, divided among the world's population, would make every person on the planet $2,500 poorer. 

Partisan showdowns have become the norm for debt limit debates as congressional Republicans call for spending cuts and President Barack Obama refuses to sign legislation with strings attached. Whether this year's negotiations bring renewed turmoil is important, for these reasons: 

1. April 15 beckons

This year, the return of the debt ceiling comes in the middle of tax-filing season, which makes it harder for the Treasury to know much money the government will have coming in -- and thus difficult to predict how long the U.S. can go without lifting the cap. The Congressional Budget Office predicts the department can make it until October or November using "extraordinary'' accounting measures to stay under the cap. Those include suspending its issuance of State and Local Government Series Treasury securities (which Treasury's already announced it will do) and suspending new investment into the Civil Service Retirement and Disability Fund, among other actions explained here

2. Remember rate increases? 

Federal Reserve policy makers are trying to gauge whether the U.S. economy is strong enough to raise interest rates for the first time since 2006. Risks still cloud the outlook -- inflation remains below the Fed's target, for instance -- and tumultuous debt limit talks could affect policy makers' thinking. In February 2014, Chair Janet Yellen told a congressional committee that "frankly, it would be catastrophic to not raise the debt limit.''  Would an impending showdown delay the first rate hike, expected as early as June? Gennadiy Goldberg, U.S. rates strategist at TD Securities USA,  says probably not, especially since the first rate hike is expected before the government is projected to run low on cash. 

3. Timing is everything

 This year's political timeline might help ease the passage of debt limit relief.  Now that Republicans run the legislative show, Senate Majority Leader Mitch McConnell has pledged no default and no government shutdown this time. What's more, if Congress fails to act before autumn, any showdown would coincide with 2016 presidential primary debates. Politicians might shy away from making themselves -- or their parties -- look reckless during that period.  A smooth resolution would be good news for the U.S. economy: Markets gyrated in response to the drama of 2011, and consumer confidence took a hit during the fiscal fracas and partial government shutdown of 2013. 

On the bright side, the debt limit's reinstatement means the Treasury, which has had to cut its cash balance to about $30 billion to fulfill a requirement in the suspension legislation, can build up cash on hand. A bill-thirsty market could be in for some modest relief. Treasury officials probably can't substantially increase the government's cash balance, as they've said would be prudent in case of a market-shuttering emergency, absent a debt limit increase. "They've been talking about that $500 billion cash buffer, but that's a total pipe dream,'' Goldberg said. 

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