Understanding How the Debt Ceiling Works
Learn what to expect when Aug. 2 comes and goes.
With the debt ceiling at the forefront of our nation's issues and area residents protesting about it, those in Haverford Township should know exactly what is going on and how it works.
For decades, America has spent more money than it has been able to bring in, so in order to close the gap between revenue and spending, the country frequently borrows money from other nations to pay their bills. Like any loan, the borrowing comes with interest, but the United States has a perfect AAA credit rating, meaning interest rates are as low as possible.
The debt ceiling represents the maximum debt our country is willing to take on, and the ceiling has been raised more than 30 times from Reagan's presidency through the current Obama administration.
If an agreement cannot be reached to raise the debt ceiling, America will no longer be able to pay all of its bills. By not raising the debt ceiling, the country can no longer borrow, meaning that there is no money to close the gap between spending and income.
Once America has missed a loan payment, the country's credit rating will immediately be downgraded by international credit rating agencies such as Moody's and Standard and Poor's. A decreased credit rating will result in increased interest rates on future loans, raising the cost of borrowing.
In addition to the increased cost of borrowing, the U.S. would also begin to cut services to its constituents, as they would not have the money to operate at full capacity. Those services could include Social Security, Veterans Benefits, Medicare and Medicaid, and other services not considered absolutely necessary to the day to day function of the government.
The bills currently being considered by congress and the senate all seek to increase the debt limit while trying to reduce spending over the coming years. The argument has more to do with which service would be cut, as well as those in favor and opposed to increasing taxes.
The Aug. 2 deadline represents the day a decision needs to be made, though numerous news reports have stated that the government has enough cash reserves to operate at full capacity for a few more months.