The Debt Ceiling

The very phrase “debt ceiling” sounds austere and restrictive, as if intended to keep a lid on government spending. In fact, the U.S. federal debt limit was first conceived almost a century ago to make it easier for the government to borrow money. But it morphed into an explosive political tool with the potential to roil financial markets, since a failure to raise the debt ceiling could eventually result in a first-ever default on some of the government’s obligations. President Donald Trump has said that there are “a lot of good reasons” to get rid of the limit altogether. But it’s still here and causing problems anew.

After being temporarily suspended by agreement of Trump and the U.S. Congress, the debt limit came back into effect on March 2, restraining the government’s authority to borrow more money. That didn’t mean a crisis was immediately at hand. The Treasury Department is employing what are known as extraordinary measures — withholding regularly scheduled contributions to a federal employee retirement fund, for instance, and using that money to keep paying debts. Those measures could keep the gears turning into September or October and enable the Treasury to continue issuing debt, but the U.S. could default on its debts if Congress has failed to act by then. Treasury Secretary Steven Mnuchin, representing the Republican White House, and House Speaker Nancy Pelosi, the highest-ranking Democrat in Congress, are leading negotiations aimed at raising the borrowing limit before Congress leaves Washington for its August recess.