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2011 U.S. Debt Ceiling Crisis Explained

By August 1, 2011 April 15th, 2018 General Updates

“Will the debt ceiling be raised?” Across newspaper headlines, TV, the internet and social media sites, the discussion has been trending towards this issue. What is all of this excitement about? To start, the United States of America reached the maximum borrowing limit of $14.3 trillion on May 16th, 2011. U.S. Treasury Secretary, Timothy Geithner, was able to keep the country solvent until August 2nd, but the debt ceiling must be raised by tomorrow in order to reduce the deficit and avoid a national default on outstanding financial obligations. In other words, the U.S. needs the ability to borrow more money to pay the bills.

Last night, Obama announced that his administration, along with the nation’s top lawmakers, had reached a bipartisan agreement to raise the debt ceiling and cut federal spending. Members of Congress must vote on this agreement today in order for it to become law.

What is the big deal?

If an agreement is not finalized by August 2nd, spending cuts will be made across the board (including defense and Medicare) and the U.S. credit rating could be downgraded from AAA to AA for the first time in history. A downgraded credit rating is difficult to reverse and this would present complications for the government as well as American citizens who need to borrow money. The supply of money and available credit would be affected and Americans could experience higher interest and unemployment rates. These factors could slow consumer and business spending, sending us further into recession. Because of the economic consequences at stake and the amount of people affected, this issue has been a main concern for many.

What’s the plan?

  • Part 1- Raise debt ceiling immediately by $400 billion, and another $500 billion after September. Plans also include cutting $1 trillion in spending over the next 10 years, which means as much as $25 billion could be cut next year.
  • Part 2- A bipartisan congressional committee must make recommendations for additional spending reductions by November of 2011, which could include entitlement and tax reform. By the end of the year, the debt ceiling will be raised by another $1.2 trillion to $1.5 trillion which should cover the Treasury’s borrowing needs until 2013.

(Source: Money.cnn.com)

Some say rushing to pass the debt ceiling bill could mean that it is not the best it could’ve been, while others say that time spent considering options could pose drastic consequences for our economy. While it is good news that a debt ceiling compromise was made over the weekend, it’s not over until Congress votes to pass the plan. Prepare for history in the making.

(Video Source: Associated Press)