Support Marketplace

The debt ceiling explained

The definition of debt

Jeremy Hobson: Well if the negotiations over this year's budget are the appetizer, and negotiations over next year's budget are the entree, the dessert is the coming fight over whether to raise the federal debt ceiling. Lawmakers will have to lift it by more than $1 trillion this year to keep the U.S. government from defaulting on its debt.

For more on what that means let's bring in Marketplace Economics Correspondent Chris Farrell. Good morning.

Chris Farrell: Goor morning Jeremy.

Hobson: So what is the big deal with this debt ceiling?

Farrell: The U.S. Treasury is the triple-A security in the world. It is the risk-free security. So if we don't raise the debt ceiling, and we end up defaulting on that debt, it would be catastrophic for the U.S. economy and the world economy.

Hobson: And have we always had this debt ceiling?

Farrell: No. The first debt ceiling came about in 1917. And then later on in 1939, we got the debt ceiling as we now know it. It's an aggregate limit; back in 1939, it was set at $45 billion, and since then, by the way Jeremy, it's been raised about 100 times.

Hobson: Yeah, it's a little bit bigger these days. Well what would happen if we didn't raise the debt ceiling?

Farrell: Well if we didn't raise the debt ceiling, sometime around May 16th, possibly, or around that date, we would then have to start scrambling to try to continue to pay our debts, that a lot of foreigners own and banks own and insurance companies and retirees own. And we have to make a lot of very difficult choices about how to conserve cash, and eventually we would face default.

Hobson: Default. And what if we do keep raising the debt ceiling? Don't investors get worried if we just keep borrowing more and more money?

Farrell: Well look, investors care about two things: one, they do want to see a long-term budget plan -- absolutely, no question about that. But secondly, investors don't even like the talk of default. This is the triple-A security in the world, and it could end up being a junk bond.

Hobson: Marketplace economics correspondent Chris Farrell, thanks so much.

Farrell: Thanks a lot.

About the author

Chris Farrell is the economics editor of Marketplace Money.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...