The Reality of the US Debt Ceiling

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Apurva Dhamankar

6/11/20231 min read

The US debt ceiling is an important but frequently disregarded part of the nation's financial system. It stands for the maximum amount of debt that the US government may legitimately incur to pay its debts.

The reality of the US debt ceiling is that raising the limit on the amount of debt that the government can accumulate has become a regular event. The debt ceiling has been raised numerous times over the years to accommodate the expanding national debt.

In fact, and you won't believe it, they've changed this ceiling at least every 9 months since 1978! The ceiling has climbed from $1 billion in 1917 to a stunning $31.4 trillion today.

If we look at the debt to GDP ratio while 77% is considered to be the limit of safety, the US stands at 134% and it is the highest that the US has ever touched in the past 150 years, every time they reach the debt ceiling, they have kept increasing it further.

Because the US has taken on too much debt, there is a chance that it will go into default. In FY22, the US paid $ 475 billion in interest alone, and it is anticipated to rise to $ 663 billion in 2023.

The US was expected to default on its debt on June 1, 2023, after a long debate about whether they would or they wouldn’t, the US has now suspended its debt ceiling and prevented a default. While most people might think that the US default problem is over, what we fail to see is that this is a very big indicator of the US dollar weakening, which will lead to a liquidity crisis throughout the world, and US trade partners will get heavily affected as the US is one of the biggest creditors in the world.

Thank you.

Regards,

Esha Shah,

Kautilya, IBS Mumbai.

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