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There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isnít increased that, before any more unnecessary bloodcurdling language is used that increases everyoneís anxiety, itís worth taking a few steps back from the edge.
First, not raising the current federal debt limit absolutely will not immediately shut down the federal government. In fact, the federal debt ceiling has virtually nothing to do with whether federal departments and agencies continue to operate. Borrowing is just one of the ways the federal government finances its activities, and not increasing the debt ceiling only eliminates one of them. The talk about the government being shut down if thereís no increase in the debt ceiling when the current level is reached in the next few months is either a gross misunderstanding of how the federal budget world works or a scare tactic. The first is merely unfortunate; the second is absolutely infuriating.
Government shutdowns occur when the appropriation that funds a department or agency isnít enacted. In fact, unless the Treasury or the Office of Management and Budget informs them, federal departments and agencies likely have no idea about the governmentís cash position or where the cash came from when they obligate funds and carry out the activities funded by their appropriation. The agencies and departments are legally required to conduct these activities; gathering the cash to pay for them is a completely separate process.
Second, and again contrary to what some have stated as gospel, reaching the debt ceiling will not automatically lead to a federal default on the nationís existing debt. That will only stop the government from borrowing more than the current limit and force it to rely on other ways to finance its activities.
Although the comparison isnít perfect, the situation is similar to what happens when individuals max out credit cards. They donít stay home with the lights off, gently rocking back and forth in a corner; they find other sources of money or change their activities to match the cash available. That could mean delaying paying a bill, taking cash from a savings account, getting a loan from a family member or friend, waiting for the next paycheck, or selling a car or some other possession. If they make a payment to bring their maxed-out credit card below the limit, they can borrow again, too.
In a letter last week to Speaker John Boehner (R-Ohio) about the debt ceiling, Treasury Secretary Timothy Geithner mentioned that the federal government has an equivalent to each of these things. What Geithner didnít mention is that the federal government also has a number of other tactics, such as leasing an asset ó the federal equivalent of renting out a room in your home ó or significantly slowing down payments to government contractors and others. These additional tactics may not have been used in the past and may be disheartening or even embarrassing to some, but they are available to avoid a crisis.