U.S. Hits Its Debt Limit

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What's Happening Today

Today Treasury Secretary Janet Yellen informed Congress that the United States hit its debt limit, causing the Treasury to start using "extraordinary measures" to pay the country's bills until that limit can be raised.

Much like you and I, the United States government also has bills to pay, but the "power of the purse" is held by Congress. That means lawmakers decide how much money the country can spend, and how much money it can borrow. When Congress doesn't authorize the U.S. taking on any new debt, we effectively hit our "debt limit." The debt ceiling has to be raised by Congress soon, or the U.S. might not be able to pay its bills.

You might think that the country's bills aren't your bills so you might not be affected. But you'd be wrong.

When the U.S. reaches its debt limit, the government looks for ways to save money so that it has enough funds to keep paying the most necessary bills. Today, the Treasury announced that it would stop fully investing in funds for civil service employees and retired postal workers. But even with these and other "extraordinary measures," at some point the government will run out of money. So what happens then?

The U.S. wouldn't be able to pay for Social Security, the salaries of government employees, or veterans benefits. If you're an investor, you might not receive bond payments. With fewer Americans receiving incomes, consumer spending could drop, pushing the already precarious economy into a recession. And just like our credit scores sink if we pay our bills late or not at all, the U.S. also has a credit rating that could be impacted. If the U.S. becomes a less desirable borrower, it could be forced to borrow with higher interest rates… which means our personal interest rates would also rise.

Or put simply, we could be facing "irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability," as the Treasury Department describes it. It's up to Congress to raise the debt ceiling before the U.S. runs out of cash, or the country could go into default.

- Kristin

What's Happening Today

US Debt Ceiling and Its Current Status (The Balance)

Debt Ceiling Dictionary: Your Guide to the Jargon (The Balance)

US Jobless Claims Drop to 190,000, Lowest Level Since September (Bloomberg)

New Home Construction in the US Fell in December (CNN)

Inflation Hit Black and Hispanic Households Hardest (The Balance)

The Economy Is Slowing Down. Is Recession Already Here? (The Balance)

A Guide To Planning Your Finances (The Balance)

Term of the Day

Debt Ceiling

The debt ceiling, or debt limit, is the amount of money the Treasury is allowed to borrow (set by Congress) to pay for spending the government has already committed to—including Social Security and Medicare payments, military salaries, interest on the national debt, and a multitude of other expenses.

Because the government spends more money than it takes in—which has been true since 2002—it can't pay its bills in full unless it borrows money to do so. The government has now borrowed the $31.4 trillion that it's allowed to under the debt limit Congress passed in 2021 (the last time the debt ceiling was reached). Lacking the ability to borrow more money, the Treasury department is now using a series of accounting tricks to continue to keep paying the government's obligations.

The law creating the debt ceiling was passed in 1917, replacing earlier restrictions on specific types of debt. Since 1978, the limit has been raised or suspended 61 times, or every nine months on average.

Off the Charts

We've all been impacted by the rapid price increases that began in 2021, but Black and Hispanic households felt the pinch more, a chart shows.