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U.S. Hits the Debt Ceiling: What Does It All Mean?

Daily Ticker

Monday, May 16 was D-Day for The United States -- the day we hit the debt ceiling.

What does this really mean anyway?

Well, first…let's define debt ceiling: "It is the level of government borrowing allowed by Congress." Think of the debt ceiling like the government's credit card limit... and it's maxed out. The current debt ceiling sits at $14.294 Trillion. This is the amount of money the government is legally allowed to borrow to fund all its functions - from defense to education to entitlement programs. But don't worry just yet. Treasury Secretary Timothy Geithner says the government can continue to pay its debts until August 2nd thanks to higher-than-expected tax revenue and "extraordinary measures" such as stopping the issuance of State and Local Government Series bonds, which fund infrastructure and other projects. In addition, Geithner says he is going to stop making contributions to the pension plans of certain federal employees.

To put the debt ceiling in historical perspective: Congress has voted 10 times in past decade to raise the debt ceiling, typically without much fuss. But this year is different. Many House Republicans say they won't vote to raise the debt ceiling unless the Obama administration agrees to big spending cuts, or at least tough restrictions on future spending. The White House says the debt ceiling vote should be separate from the budget debate, so an All-American standoff is occurring.

Failure to raise the debt ceiling could cause the government to default on its debt payments, something unprecedented in U.S. history. In a statement released Monday, Treasury Secretary Tim Geithner warned such an outcome will result in "catastrophic economic consequences for citizens." Government officials Ben Bernanke, Austan Goolsbee and Defense Secretary Bill Gates agree, as do Wall Street heavyweights like Bill Gross, Warren Buffett and Jamie Dimon.

But many in the GOP say that's a bluff and the government can continue to make its debt payments by selling assets such as its gold holdings or real estate, or by cutting spending on other things, like Social Security and Medicare.

Hopefully we won't find out who's bluffing and who's right.

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