But many economists worry it would be a disaster. Financial markets – unstable as an emotional teen in the best of times – could judge that the US is defaulting on its debt, and swoon accordingly.
“This could result in significant economic and financial consequences that may have a lasting impact on federal programs and the federal government’s ability to borrow in the future,” concludes a Jan. 4, 2013, Congressional Research Service debt limit report.
The heart of the debt limit problem is that the US government spends more money than it receives in tax revenue. (Yes, we know you’re shocked about that.) The Treasury Department covers the difference by borrowing cash.
Back in the dawn of the Republic, Congress used to vote to approve each new debt issue. That became tiresome, and by 1939 lawmakers had established a debt limit up to which Treasury could borrow without asking permission of Capitol Hill.
Today the debt limit is analogous to a limit on Treasury’s credit card. But unlike your credit card (hopefully) this involves debt the US is not paying off. Continued deficits mean Washington has to borrow more and more money. Accordingly, it keeps nearing its debt limit. Congress has voted to raise the debt limit 13 times since 2001.