Debt Ceiling


DEFINITION of 'Debt Ceiling'

The maximum amount of monies the United States can borrow. The debt ceiling was created under the Second Liberty Bond Act of 1917, putting a "ceiling" on the amount of bonds the United States can issue. As of the end of July, 2011 the debt ceiling was set at $14.3 trillion.

Also known as the "debt limit" or "statutory debt limit."


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BREAKING DOWN 'Debt Ceiling'

Before the debt ceiling was created, the President had free reign on the country's finances. In 1917, the debt ceiling was created during World War I to hold the President fiscally responsible. Over time, the debt ceiling has been raised whenever the United States comes close to hitting the limit. By hitting the limit and missing an interest payment to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.

There has been controversy over whether the debt ceiling is constitutional. According to the 14th Amendment of the Constitution, "The validity of the public debt of the United States, authorized by law ... shall not be questioned." The majority of democratic countries do not have a debt ceiling, with the United States being one of the exceptions.

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