- [Narrator] Over the past 20 years,
the US has borrowed more and more money.
As a comparison to the share of GDP,
it's around 100%,
the highest since World War II.
The biggest recent hike happened in 2020
when the coronavirus pandemic hit the US
and crippled the nation's economy.
- Congress finally cleared
a $900 billion coronavirus relief package
just before midnight last night
and with it a $1.4 trillion bill
that funds the government through the fiscal year.
- [Narrator] The question of whether
it's economically feasible
to keep adding to this mountain of debt
has long vexed Congress,
which is in charge of the debt ceiling,
the law that decides how much the US is allowed to borrow.
- We Democrats supported lifting the debt ceiling
because it's the responsible thing to do.
- I implore them one more time
not to play Russian roulette
with the American economy.
- [Narrator] As lawmakers prepare
to likely raise the ceiling
again in early December,
here's a look at how the US's debt works
and why economists say the US can keep on borrowing,
at least to a point,
provided, of course, Congress raises the debt limit.
- There are some limitations though
on how much they can ultimately borrow,
and those have to do with inflation and interest rates.
- [Narrator] Here's what happens when the government needs
to borrow more money to may for its economic agenda.
First, Congress passes laws
to determine spending and taxes.
If the government spends so much
that spending exceeds taxes,
the Treasury must finance the deficit by borrowing,
issuing Treasury bonds and bills.
- When Treasury issues a Treasury bond
or a Treasury bill,
this is basically an IOU.
An investor gives the Treasury some money
with an expectation
that they'll get the money back with interest.
- [Narrator] Greg Ip, who has covered the US economy
for The Wall Street Journal
for nearly two decades says
that people view Treasury bonds as a safe option for saving.
So when the Treasury sells bonds to investors,
two things happen.
First, the government gets money to pay its bills,
and second, it agrees to pay investors interest.
- So when the government issues debt,
they will use that money to meet all the obligations
the federal government has.
They may use it to send
Social Security benefits checks to recipients.
They may use it to pay the salaries of the military
or the civilians in the federal civil service.
And they may use it to pay the interest
on the debt they've borrowed in the past.
If interest rates are zero, then in theory,
the government could borrow an infinite amount
because it will never have to pay any interest on it.
Conversely, if interest rates are extremely high,
that really limits how much the government can borrow
because the interest bill would be so large.
- [Narrator] Today interest rates are at historic lows,
which economists say means the government
can keep borrowing.
But the Treasury is competing for savers' money
with other borrowers,
like households, companies and other governments.
If those other people decide to borrow more,
the Treasury would have to offer a higher interest rate
to attract those savings.
- So if interest rates go up a lot,
that's going to significantly increase the bill
that the government pays for interest on its debt,
in which case, one of three things have to happen.
Either they have to raise taxes
to pay that added interest.
They have to cut other types of spending,
which nobody likes.
Or it has to borrow even more.
And then you get this cycle
where high interest forces you to borrow more,
which raises the debt,
which forces interest rates even higher,
and then you have to borrow even more.
And that's a very dangerous cycle to get into.
- [Narrator] But there's another limitation too.
If Congress puts too much
of the borrowed money back into the economy
through things like stimulus checks,
that can cause inflation.
- If it borrows that money
and then goes and spends it,
and that spending exceeds the economy's ability
to produce the goods and services needed
to satisfy that spending,
the result of too much spending
chasing too few goods, and you get inflation.
And when inflation goes up, interest rates go up,
and you're back into that problem
of the high interest bill
making the debt unsupportable.
- [Narrator] Inflation was 5.3% in the 12 months
through August, close to the highest in 12 years.
But Ip says this is largest a different type of inflation.
- This seems to reflect mostly temporary factors.
We're coming out of this pandemic,
so there's suddenly this surge in demand,
and a lot of the restraints on the supply
of a lot of products.
Hopefully these transitory shortages
will go away in a year or two
and inflation will fall back.
The kind of inflation you worry about
is when you have persistent levels of spending
that constantly exceed the economy's fundamental capacity
to supply stuff.
That's the kind of inflation
that lasts for a long time.
- [Narrator] So back to Congress' role.
- The debt ceiling needs to be addressed.
The only question is who should address it?
And I hope our friends on the other side will step up
and take care of it.
- Since 2011, each of the seven times
that the debt limit was addressed,
Congress did so on a bipartisan basis.
- [Narrator] Congress decides on the debt limit.
When the Treasury has reached it,
it can't issue more until Congress votes
to raise the debt limit.
That's even if Congress already passed a budget
that requires borrowing.
This has led some to wonder
why can't we just print off the money
to pay the mountain of debt?
- If the Fed prints too much money this way,
you're back into that problem
of the Treasury spending that money
and causing inflation and cause the interest rates to go up.
- [Narrator] With the option
of printing money off the table,
it will ultimately come down to Congress
to raise the debt limit in December
to avoid a default on the debt.
(pensive music)