The US has been in the middle of a crazy political stoush over this thing called the “debt ceiling” for the past few months which has been threatening to blow up and cause ripples around the world… So in this Squiz Shortcut, we look at what a debt ceiling is, why it’s become such a big deal now, and how it could play out.

Ok, ‘debt ceiling’ is some serious jargon. What is it?
It’s just a fancy term for the amount of money the US Government can borrow to pay its bills. It’s not too different from getting a home, car or business loan when the bank decides how much it will lend you based on your capacity to repay the loan and interest every month.

So a bank decides how much the US can borrow?
Nope – the Congress (the equivalent of our Federal Parliament) gets to set that amount.

What’s the current ‘debt ceiling’?
About US$31 trillion. Remember, it’s been an Aussie political talking point of late that our national debt is heading towards A$1 trillion… But the US hit that figure in January, and its Federal Treasury has been using special powers to move money around to keep paying the bills.

How did they get into so much debt?
The US Government has been running up debt since it became a nation. And in recent years, administrations have been running annual deficits for over 20 years at an average of about US$1 trillion annually.

What does that mean?
They have had to borrow every year just to fund running the government. Things like pensions, healthcare, defence and salaries of government workers – they’ve needed to top up the money coming in via taxes and the like by borrowing money.

And is that a problem?
That’s a very big question, and the answer depends on who you talk to. But at a very basic level, there’s nothing wrong with debt – as long as you can service the loan. But America’s debt has tripled since 2009, and many Americans think something must be done to reign in Government spending.

Is that why Congress won’t let Joe Biden borrow more?
In a nutshell – but there’s also a bit of politics involved…

Has it been done before?
Congress has increased the debt ceiling 78 times since 1960 – more than once a year on average. Note: Republican presidents have been more likely to ask for the limit to be raised.

So why not increase the limit this time if it’s been pretty routine?
A couple of things have collided. First, as we said, debt in the US has gone through the roof, so it’s been a hotly debated topic. And it means that the limit has had to be renegotiated more often. And the other thing is the polarisation of US politics – so there’s no business-as-usual anymore. Almost everything is supercharged to inflict pain on the opposing side.

Have been blow-ups over debt in recent years?
For sure. When Obama was President in 2011, a stand-off over the debt ceiling led to the nation’s credit rating being downgraded for the first time. And Biden had to deal with a similar thing in 2021. Both incidents created a lot of noise, but it wasn’t as dramatic as this.

Why is everyone so worried this time?
Janet Yellen, the head of the Treasury in the US, says without an agreement to lift the debt ceiling, the government will default on its debt obligations. Put simply, they won’t have the funds to pay their loans.

And that’s bad?
It would be the first time in history that the US has defaulted on its debt. And Yellen says it would cause “irreparable harm to the US economy, the livelihoods of all Americans and global financial stability.”

There were already fears of a recession, right?
Precisely and that’s why things are so tense in Washington. The US economy was already bracing for a potential recession over the next 12-18 months. So what’s happening there right now is the kind of confidence killer America really doesn’t need.

So we’re rooting for America to sort this out pronto…
Exactly – it’s also one of the reasons PM Anthony Albanese was so understanding when US President Joe Biden cancelled his trip to Sydney for the Quad Summit scheduled for this week. We know from past events if the US gets into strife, it will be bad for international markets, including ours.

What’s being done to sort it out?
Biden’s meeting with the Republican Speaker of the House Kevin McCarthy and they have come a long way in just a few days when both sides were pretty much screaming at each other that their demands were unacceptable.

What’s been the problem?
To date, pure politics has been an issue… The Republicans are hoping to make Biden look weak while painting the Democrats as bad managers of the economy.

That’s pretty cynical…
True – and there is also no doubt there are Republicans who believe US spending is out of control and must be reined in. And they’ll do anything – even if it’s a dramatic stand-off over debt – to get the government to cut back.

What are the big things the Republicans are asking for in return for their support to lift the ceiling?
They have wanted the Democrats to cap spending for several years except in defence or border control. And they have advocated for tightening the rules on who can get unemployment benefits – including food assistance.

I’m guessing the Democrats are pretty lukewarm on most of that?
Look, they are – but what’s interesting is watching the 2 sides inching towards each other. So the Republicans are taking some more extreme demands off the table, and the Democrats have acknowledged some concerns about spending.

So how long until the money runs out?
Yellen says early June is the “hard deadline” – she said she can’t put an exact date on when the government runs out of funds because they can’t precisely forecast how much tax they might collect until then – but it could be as early as 1 June.

Yikes…
Yep.

The clock is really ticking…
Yeah, because even if Biden and McCarthy shake hands on a deal today, it still has to be passed by Congress, which takes time because plenty of members in both parties will have trouble swallowing the deal.

It’s going to get hectic…
It already is.

Squiz recommends:

Jimmy Fallon “slow jamming” about the debt ceiling.

A good backgrounder from the Council on Foreign Relations on the whole debt ceiling issue.