Investing Dictionary #1: Debt Ceiling

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The term debt ceiling is constructed under the Second Liberty Bond Act of 1971, this means ceiling a number of bonds the United States can issue. The Liberty Bond is a kind of bond that is issued solely by the U.S. government during the World War 1. These Liberty Bonds were introduced as a means of financing the war effort in Europe.

Debt Ceiling and Why It Matters?

As of 2011, the debt ceiling was set at $14.3 trillion. Debt Ceiling is also known as the debt limit or statuary debt limit. The President then, before the debt ceiling was created, has the free reign of the country’s finances! The debt ceiling mainly was used to make the President fiscally responsible for everything that was happening financially by that time, over time the ceiling was set higher and higher by year it almost reached its limits.

When in an instance that the limit is reached, the United States would be in default; they would be lowering their credit rating and increasing the cost of its debt. Some worst showdowns that reached the limit have led the government to shutdowns. The conflict that is normal existence between the White House and the Congress; they argue whether or not the debt ceiling is to be used as a leverage to push budgetary agendas.

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1995 Conundrum

Looking back to 1995, the debt ceiling was used as a negotiating tool to increase the spending cuts. This was all devised by then-House Speaker Newt Gingrich, a part of the republican congress. Some instance like, President Clinton refused to increase the maximum cap of the debt ceiling, which the lead to a total shutdown of the government. The White House together with the Congress, after a very long discussion, had made the appeal on a balanced budget with modest spending cuts and tax increases.

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Obama Faces Same Dilemma Last ‘11

The most recent president Barack Obama has faced the same issue last 2011, the Republicans that are part of the Congress argued for deficit reductions in order to approve an increase in debt ceiling. It was that time that the U.S. Treasury debt was stripped of its triple-A rating.

The most recent government shutdown was around 2013, it was down for a good 16 days after conservative republicans attempted to defund the Affordable Care Act by leveraging the debt ceiling. It was eventually led to the suspension of the debt limit when the Treasury estimated to run out of money!

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