Raising the debt limit

Date posted: February 1, 2011

Periodically Congress and the President must agree to increase the country’s debt limit to allow the government to continue borrowing money. Every time this issue arises, it sparks intense debate. What would happen if the debt limit were not increased? N.C. State University economist Mike Walden answers.

“What would happen … is the federal government could not go into the credit markets and borrow money. Now many people would say, ‘Well, this is good.’

“But the problem is we do owe about$300 billion to $400 billion a year on servicing the national debt — in essence, paying interest on the money that the federal government has borrowed. And you would either have to come up with that money — that is, you would have to cut $300 billion or $400 billion from other federal programs to do that. Or if you didn’t pay the interest the effectively, the U.S. would default on its debt.

“And that has never, never happened in our history. It would damage our reputation as a borrower. Our interest rates we would have to pay in the future on borrowing would go sky high. Other interest rates in the economy would likely go up. This is probably something we don’t want to do; in fact, I would go even bolder and say we don’t want to do that.

“So the issue is unless our policy makers can come up very quickly with $300 billion or $400 billion so we are assured we can service that national debt, the corner that policy makers have been backed into is they have got to raise the debt limit.

“I think what probably is going to happen is the debt limit will be raised, but there will be some conditions on it that somehow there is at least a start of a plan toward reducing future deficits and debt.”

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