The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. As Kavan Choksi Professional Investor points out, this debt ceiling was created under the Second Liberty Bond Act of 1917. In case the United States government national debt levels go up against the ceiling, then the Treasury Department has to resort to other extraordinary measures to pay government obligations and expenses until the ceiling is raised again.

Kavan Choksi Professional Investor provides a good understanding of the United States debt ceiling

Data published by the Treasury Department showed that “total public debt outstanding” went up to $34.001 trillion on December 29th 2023. This milestone comes about three months after the US national debt surpassed $33 trillion, as the budget deficit, which is the difference between what the government spends and what it receives in taxes, ballooned. The national debt is increasing during a time when the economy is relatively string and unemployment is low, making it a good time to rein in the federal deficit. The government tends to commonly improve spending during weak economic periods and high unemployment in an effort to stimulate growth.

Before the debt ceiling was created, Congress had free rein over the country’s finances. In the year of 1917, the debt ceiling was created during World War I to make the federal government fiscally responsible. Over time, the debt ceiling has been raised whenever the US has approached the limit. By hitting the limit and failing to pay interest payments to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.

As Kavan Choksi Professional Investor mentions, having a debt ceiling in place is considered to be a practical way of keeping the finances of the country in check. It allows the United States Treasury to easily issue bonds without having to get approval of the Congress each time the federal government needs to raise money, as doing so can be a very cumbersome process. With a debt ceiling, appropriate boundaries are maintained for a more efficient monetary approval process.

Raising a debt ceiling provides the country with extra wiggle room to keep financing federal operations. In simple terms, it provides leaders with the financial power to keep the government running. A debt ceiling also provides the means to continue funding important social programs. In the United States, it means that the government is able to fund Medicare and Social Security, both of which are vital for retirees and qualifying recipients.

The United States debt ceiling is pretty fluid, and hence can be raised quite easily. In fact, it has been raised multiple times over the decades, which also raises questions on whether it’s effective as a tool to ensure fiscal responsibility. The U.S. has reached record-high levels of debt over time. While it does have its advantages, increasing the debt ceiling tends to also have an inverse effect on the country’s reputation in the global markets. As such, it might lead to a downgrade of the credit rating of the U.S. while increasing the overall cost of its debt.