Hitting the Debt Ceiling: Why its a Big Deal

The Gross National Debt

Treasury Secretary Geithner sent a special letter to every member of Congress today warning them that the U.S. could reach its debt limit as early as March 31st of this year. He said that if lawmakers fail to raise the debt limit, it could “precipitate a default by the United States.” As of today, the national debt stands at $14.01 trillion, which is not far from the current debt ceiling of $14.3 trillion.

The debt ceiling is a cap that Congress sets on the amount of debt that the government can borrow. Although the debt limit has been raised 10 times since 2001, the debt ceiling is important because it helps Congress control spending. Each time the debt ceiling is raised, lawmakers are forced to actively assess the state of U.S. fiscal finances. If the debt ceiling is reached (and it never has been), the Treasury would not legally be permitted to borrow additional money.

The reason why this could “precipitate a default” according to Geithner is because the U.S. government funds operations and pays its creditors by borrowing. If they are unable to borrow, they are unable to make up the difference between what they spend and what they take in and if left unresolved this could lead to a default. Even a hint of default risk could cause rating agencies to downgrade their outlook for U.S. debt which would be enough to cause the dollar to nose-dive. For this reason, Geithner’s warning should not be taken lightly.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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