The US Debt Ceiling: Is America in danger of default?


What is a debt ceiling?

As the name suggests, it's an absolute limit on national debt. The UK doesn't have one, though Budgets have to be approved by Parliament, but the US has had one since 1940, when it was set at a modest $49bn.



How high is the ceiling?

High, by any standards. The current limit is $14.294 trillion, ie $14,294,000,000,000 – fourteen million million dollars. Even set against the largest economy in the world, it is still pretty impressive; approaching 100 per cent, the highest in America's peacetime history.



When will America run out of money?

The US Treasury say that they will run out of money to pay their debts on 2 August. That is the date when book-keeping dodges run out and the train hits the buffers. An emergency, short-term fix could avert disaster, but for now the wrangling between the President and Congress continues.



Why can't they agree?

President Obama is reluctant to cut social and health programmes. His Republican opponents in Congress, especially the "Tea Party" faction ("nutters" according to our own Vince Cable) refuse to countenance tax rises, because they would hurt the recovery. Most economists say both will be needed to fix the deficit in the short or long term.



What if the ceiling is hit?

First, the federal government's spending will be limited to its cash flow – no more borrowing. Given that the tax revenues only provide for 60 per cent of government spending it implies a 40 per cent plus cut in government spending immediately - rather more draconian than even the British austerity programme. The US Treasury would have to decide which government employees get paid and which have to do without pay. The decision point would be $23bn in Social Security payments due on 3 August, not covered by tax revenues. Bad as that is, there is a second unpleasant consequence; that the US would have to tell those investors cashing in their bonds that it cannot honour them. Such a default would send shockwaves around financial markets.



What happens then?

No one knows, as, with the UK and a few others, the US has never run away on a debt (not counting inflation).

Any good news?

The international body that represents the credit ratings agencies say that it might not treat the default as a default. The financial panic might not then happen.



Can the US pay its bills?

Yes. The American "default", unlike the recent one in Greece, say, is entirely technical. The US is in the fortunate position that it can virtually print as much money as it wants, so willing is the world still to accept US Treasury bills and bonds as "safe" assets. There are limits to that – hence the popularity of gold and the Swiss Franc – and long term the US will have to live within its means. But, for now, the Chinese, Gulf states and others are happy to hold their paper.



Long-term damage?

Potentially great. Missing bond interest payments or redemptions would mean that the credit rating agencies would downgrade the US. That would mean Americans would have to pay more interest on their mortgages and other borrowings than otherwise; it would cost them real money every month. Any sustained drastic reduction in US government spending would also threaten to push America back into recession.

PROMOTED VIDEO
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Sport
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
News
people

Watch the spoof Thanksgiving segment filmed for Live!
News
ebooksNow available in paperback
Sport
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books
Sport
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
All British heavyweight clash gets underway on Saturday night
News
i100 Charity collates series of videos that show acts of kindness to animals
Arts and Entertainment
One of the installations in the Reiner Ruthenbeck exhibition at the Serpentine Gallery
artCritics defend Reiner Ruthenbeck's 'Overturned Furniture'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Austen Lloyd: Company Secretary

Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

Citifocus Ltd: German Speaking Client Specialist

£Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

Citifocus Ltd: Performance & Risk Oversight

£Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

£90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game