National Debt Cap

There are many aspects of the national debt that are seriously misunderstood. In this article, we take a look at the national debt cap and its significance.

Ceiling

The national debt cap is also often called the ceiling. It refers to a number that is set by law that cannot be passed by the government when borrowing money. You can think of it as a credit card spending limit for the government. 

Who Sets?

The beauty of the national debt cap is how it is set. There is no giant credit card company out there sending notes on increases and blank checks Congress can use to buy things. No, it is the cushiest deal ever – Congress sets the cap. Yes, the party that is borrowing is setting its own cap and it can vote to raise that cap whenever it likes.

Think about this for a second. This is the equivalent of you being in a store and being told your card is maxed out. You respond by calling the credit card company and telling them to raise the limit a few grand. This is essentially what Congress is doing…and does frequently.

Current Cap

As I write this, the current national debt cap is set at $14.3 trillion. We have hit the cap, but are still paying our bills because of tax revenue coming in. The Treasury has noted we have until the end of July before the money runs out. At that point, we will either need to see the cap raised again or much of the government will shut down. Those who wish to raise the cap are looking to add about $2 trillion to it.

Consequences

So, what happens if the cap is not increased? All hell will breakout. It isn’t so much that the government would start to shut down, but that the international faith in the country and dollar would be shaken. We are the country of last resort when it comes to finances and people buy the dollar like mad when things get rough. If we default on debts, that entire scenario changes and not for the better. We could see the dollar heavily and suddenly devalued and interest rates go through the roof.

The national debt cap is obviously a very important number you need to understand. While we need to raise it before the end of July to keep our economic standing, the truth of the matter is we need to slash our spending to avoid doing it again.

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