Changes

According to the [[Constitution]], the Congress must approve all borrowings on behalf of the United States.  Before the 20th century, Congress approved all bond issuances separately and explicitly.  With the introduction of the debt ceiling, the treasury now had a line on which it could borrow as needed, without having to go back to Congress for borrowings under the ceiling.

According to the [[Constitution]], the Congress must approve all borrowings on behalf of the United States.  Before the 20th century, Congress approved all bond issuances separately and explicitly.  With the introduction of the debt ceiling, the treasury now had a line on which it could borrow as needed, without having to go back to Congress for borrowings under the ceiling.

== Components of the Debt ==

== Components of the debt ==

[[File:Federal Debt graphic PD WC.jpg|thumb|280px|Components of Federal Debt As Percentage of GDP FY1980-FY2007]]

[[File:Federal Debt graphic PD WC.jpg|thumb|280px|Components of Federal Debt As Percentage of GDP FY1980-FY2007]]

value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt is projected to reach $10 trillion by the end of FY2011, the wealth effect could potentially be large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.

value of existing government debt, as investors would be willing to pay a lower price (i.e., demand a higher rate of return) for Treasury securities to compensate for the greater credit risk. This would cause a negative “wealth effect” for debt holders, and debt holders would be expected to reduce their purchases. Since the publicly held debt is projected to reach $10 trillion by the end of FY2011, the wealth effect could potentially be large. The most damaging wealth effects could come from financial institutions that hold U.S Treasury securities. At the end of 2010, commercial banks held about $300 billion of U.S Treasury securities, while insurance companies, Government Sponsored Entities (GSEs), and bond dealers held another $400 billion. As demonstrated during the [[financial crisis of 2008]], financial firms “leveraged losses” can lead to a credit crunch that affects the economy as a whole.

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur.

Aside from foreign buyers of U.S. Government debt, borrowing can only be financed through savings, and government borrowing competes with business borrowing to create jobs for the same pool of national savings. By increasing the demands on that pool of national savings, government borrowing pushes up the cost of all borrowing through higher interest rates, causing businesses to finance less capital spending and job creation than they otherwise would be able to. Less business borrowing for job creation, plant and equipment, and capital spending results in lower [[gross domestic product]], and hence lower future national income, than would otherwise occur. <ref>''[https://www.hsdl.org/?view&doc=145045&coll=limited The Sustainability of the Federal Budget The Sustainability of the Federal Budget]'', Congressional Research Service, June 28, 2011.</ref>

== History of the Debt Limit ==

== History of the debt limit ==

The Second Liberty Bond Act of 1917, which helped finance the United States’ entry into [[World War I]], allowed the U.S. Treasury to issue long-term Liberty Bonds marketed to the public to hold down the federal government's borrowing costs. The 1919 Victory Liberty Bond Act raised the maximum allowable federal debt to $43 billion, although the total outstanding federal debt at the time was only $25.5 billion.

The Second Liberty Bond Act of 1917, which helped finance the United States’ entry into [[World War I]], allowed the U.S. Treasury to issue long-term Liberty Bonds marketed to the public to hold down the federal government's borrowing costs. The 1919 Victory Liberty Bond Act raised the maximum allowable federal debt to $43 billion, although the total outstanding federal debt at the time was only $25.5 billion.