In-Depth: Sponsoring Sen. Rand Paul (R-KY) introduced this bill to prevent the U.S. from defaulting on its debt if Congress fails to raise the debt ceiling, and offered the following statement when he authored this legislation’s predecessor:
“My legislation takes the possibility of default off the table so we can continue to push for fiscal restraint. There is no reason the government would — or should — responsibly consider the idea of default.”
Of Note: The term ‘debt held by the public’ refers to individuals, companies, state or local governments, Federal Reserve Banks, and foreign governments that own federal debt securities like bonds, T-bills, TIPS, savings bonds. Currently, debt held by the public accounts for about $13 trillion of the total national debt, which exceeds $18 trillion.
Once a country defaults on its sovereign debt, there is a risk of a debt spiral beginning. A debt spiral happens when interest rates on the country’s debt securities rise because of a default, which means that the government has to spend more money servicing its debt. In the absence of economic growth and increased tax revenue, this requires the government to issue more debt simply to service existing debt.
The debt limit was most recently through March 1, 2019 by the passage of the Bipartisan Budget Act on February 9, 2018.
Summary by Eric Revell(Photo Credit: rrodrickbeiler / iStock)