Latest developments in debt ceiling standoff

July 15, 2011 - 7:59 PM

Congress has until Aug. 2 to raise the federal borrowing limit or the government will run out of money and possibly default on its debt. House Republicans say they won't raise the debt limit without equal spending cuts. President Barack Obama and Democrats insist that higher revenues must be included.

Friday's developments: Congressional leaders put aside negotiations on a sweeping deficit-reduction package despite a plea from President Barack Obama to "do something big" to stabilize America's finances. Instead, lawmakers embarked on competing fallback plans as the deadline neared. A House Republican version was given little chance of success, even by some supporters, and a bipartisan Senate approach holding out more promise would allow Obama to raise the debt limit without a prior vote by lawmakers. That plan was likely to include limits on spending across thousands of government programs and possibly a down payment on budget cuts.

Markets react: A late rally Friday prevented the stock market from having its worst week in nearly a year as investors seemed unaffected by the debt debate in Washington. Late in the day, the Treasury Department announced it was taking the final steps in an unusual series designed to avoid exceeding the current $14.3 trillion debt limit. Officials have cautioned that a default will occur if the limit is not increased by Aug. 2, causing severe damage to a national economy struggling to recover from the worst recession in decades.

What's Next: House Republicans prepared to hold a vote next week to allow an increase in the debt ceiling through 2012 as long as Congress approves a balanced-budget constitutional amendment. In the Senate, the Republican and Democratic leaders worked on a bipartisan plan that would allow Obama to raise the debt limit without a prior vote by lawmakers.

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Some background:

Q: What is the debt ceiling?

A: It's a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It's unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.

Q: What is the federal deficit, and how does it differ from the debt?

A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion — a ceiling set in 2010.

Q: Why is the prospect of not raising the debt ceiling so worrisome?

A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country's credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.

Q: Who holds the $14.3 trillion in outstanding U.S. debt?

A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities — banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that — $4.5 trillion — is held by foreigners including China with $1.15 trillion and Japan with $907 billion.

Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?

A: The biggest contributors to the nearly $9 trillion increase over a decade were:

—2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.

—Additional interest costs: $1.4 trillion.

—Wars in Iraq and Afghanistan: $1.3 trillion.

—Economic stimulus package under Obama: $800 billion.

—2010 tax cuts, a compromise by Obama and Republicans that extended jobless benefits and cut payroll taxes: $400 billion.

—2003 creation of Medicare's prescription drug benefit: $300 billion.

—2008 financial industry bailout: $200 billion.

—Hundreds of billions less in revenue than expected since the Great Recession began in December 2007.

— Other spending increases in domestic, farm and defense programs, adding lesser amounts.