Borrowing and Debt Ceiling
National interest is supreme but after politics is over.
Ever heard of government shutdowns? It happens only in the USA. At the time of this writing on October 2, 2025, the USA Government is in shutdown mode. It is the time when Congress fails to pass funding legislation and non-essential federal operations halt. It has occurred 21 times since 1976, when the modern process began under the Congressional Budget Act of 1974. It all started in 1917 when the Debt Ceiling Act was passed.
America needed money for World War I. Congress passed the Second Liberty Bond Act. Before this, Congress approved individual treasury bond issue. Now they set an overall limit instead. In 1939, things got simpler. The Public Debt Act, 1939 created one unified ceiling of USD 45 billion. No more separate limits for different types of debt.
The 1940s through 1960s saw constant increases in debt limit. World War II needed massive borrowing. Then came the Korean War. The Cold War kept spending high. Congress just kept raising the ceiling whenever needed.
Deficit Financing
By ending gold convertibility, Nixon freed the dollar from any anchor to real value. The fact remained that America would no longer need to balance its books or worry about running out of gold to back its currency. ** The dollar became valuable simply because everyone agreed it was valuable.** Also, because oil, the world's essential commodity, was priced in dollars. The demand for energy was insatiable. So was the demand for dollars to purchase energy. The relationship of the dollar and Oil is discussed in detail in the Chapter titled Oil Wars.
This created what economists call an “exorbitant privilege”, the ability to print money and have other countries accept it as payment for real goods and services. Over the next five decades, this privilege allowed America to run massive trade deficits, finance enormous military expenditures, and live beyond its means while exporting inflation to the rest of the world.
Nixon thought he was making a temporary fix to get through 1971. He actually created a system that would let America accumulate $37 trillion in debt while still retaining its position as the world's dominant economic power. However, he was not entirely irrelevant to the concept of deficit financing. He was concerned. But he had no option. This is an extract from Chapter 1971 of his memoir:
“ When I briefed the Republican congressional leaders on this budget, which in effect endorsed the concept of deficit spending in periods o f high unemployment, Congressman Les Arends of Illinois shook his head sadly and said, “Mr. President, I’ll support you as I always do, but I’m going to have to burn up a lot of old speeches denouncing deficit spending.” I answered, “I’min the same boat.”
Impoundment
Nixon was trying to control the excess spending by Congress with an old tool called impoundment. This is how it worked:
Congress passes an appropriation bill
President signs the bill into law (or it becomes law over his veto)
President then refuses to spend the money that'snow legally appropriated
The funds sit unused in the Treasury
It appears that Nixon was so sure of his power of impoundment that he may have thought that deficit financing could be controlled through Impoundment but this was about to change. Remember that Impoundment was different from pocket veto. In case of pocket veto a bill passed by Congress would neither be signed by the President not returned for reconsideration. The bill would “die” when Congress is out of session.
Early presidents generally impounded funds when circumstances changed (Jefferson's peace with France) or for efficiency. Nixon claimed an inherent executive power to refuse spending on policy grounds. It was a fundamentally different constitutional argument.
Nixon transformed a minor administrative tool into a constitutional weapon. This backfired completely and strengthened congressional budget power permanently. You cannot steal Congress's power over money. The Constitution's separation of powers survives presidential ambition.
But Nixon's real failure was strategic. He tried to solve his economic problems by breaking constitutional norms. This created more problems than it solved. The gold standard decision needed honest economic policy. Impoundment was just political theatre that made everything worse.
Congress Strikes Back
The Congressional Budget and Impoundment Control Act of 1974 was Congress's nuclear response to impoundment. They did not just limit impoundment. They rebuilt the entire budget process. It created new budget committees in both houses. Congressional Budget Office for independent analysis. Formal procedures for presidential spending requests. Nixon’s attempt to become budget dictator ended up creating permanent limits on presidential spending authority.
Most importantly, impoundment without congressional approval became illegal. Presidents could request rescissions but Congress had to approve them. The law passed with veto proof majorities. Nixon was too weak from Watergate to fight back effectively.
Even Nixon'sown party abandoned him. Republican senators voted for the 1974 Act. They chose constitutional order over partisan loyalty.
Future presidents learned the lesson. You cannot steal Congress's power over money. The Constitution's separation of powers survives presidential ambition. Now the President had to ask Congress to cutback on spending by asking for rescissions.
Ronald Reagan requested massive rescissions in the 1980s. But he followed the 1974 Act's procedures. Congress approved some and rejected others. However, the net result was that Congress now had unlimited powers to spend and pass budgets without actually having the money to spend.
Birth of Borrowing Limits
It is widely understood ** that spending money one does not possess is impractical** . However, this principle seems to elude the Congress and President of the United States. Many insightful individuals have attempted on a national canvas in America to rectify the issue of deficit financing through borrowed funds without success. Regrettably, politics often undermines solutions rather than facilitating progress. Consequently, even well-intentioned objectives can devolve into political conflicts.
The Budget Wars
The 1985 Gramm-Rudman-Hollings Act was desperate. Congress wanted automatic spending cuts if deficits stayed high. The Supreme Court struck down the law and the enforcement mechanism. The 1990 Budget Enforcement Act learned from failure. It created “pay as you go” rules. Want new spending? Find cuts elsewhere or raise taxes. This actually worked for awhile.
November 1995 changed everything. Republicans controlled Congress. They wanted massive cuts. Clinton refused. The government was shut for five days. Then again for 21 days. National parks closed. Passport offices stopped working. Veterans could not get benefits.
Newt Gingrich, the Republican Speaker of the House in the mid-1990s, believed that President Bill Clinton would give in during the 1995-1996 budget stand-off. Republicans had just won control of Congress in the 1994 midterms on Gingrich’s “Contract with America,” and they felt they had a mandate to slash federal spending, reform welfare, and balance the budget on their terms.
To force Clinton’s hand, Gingrich and House Republicans refused to raise the debt ceiling or pass a continuing resolution unless the President agreed to their budget cuts. They thought Clinton, a centrist Democrat, would compromise quickly to avoid disruption.
Clinton, however, held firm. He vetoed Republican budget bills, insisting that their proposals cut too deeply into Medicare, Medicaid, education, and environmental protection. He framed himself as defending ordinary Americans from extreme partisanship.
As the stand-off dragged on, the government shutdown twice, as stated above. The shutdowns hurt federal workers and the public, but they also exposed Republicans to political backlash.
Public opinion polls showed that Americans largely blamed Congressional Republicans rather than Clinton for the impasse. The image of Gingrich complaining about his treatment on Air Force One only deepened the sense that he was petty and overplaying his hand. Realizing the political damage, Gingrich and the Republicans relented. They reopened the government and eventually struck a compromise budget deal, but on terms closer to Clinton’s than their own.
This taught everyone a lesson which was forgotten soon. Debt ceiling fights could become political weapons. The stakes kept rising after this.
The 2011 Crisis
In 2011, the United States faced one of the most dangerous debt ceiling crises in its history. Unlike earlier stand-offs, this confrontation was driven by the Tea Party movement, hard-line fiscal conservatives elected in the 2010 midterms. Their central demand was deep, immediate cuts in federal spending, with many openly declaring they would not fear government default. To them, default seemed less threatening than allowing the debt to continue rising.
President Barack Obama and congressional Democrats insisted that raising the debt ceiling was non-negotiable, since it only authorized payment for spending Congress had already approved. Obama initially sought a “grand bargain” pairing a ceiling increase with long-term deficit reduction through both spending cuts and new revenues. But Tea Party Republicans rejected any tax increases outright.
Through June and July, negotiations see-sawed between the White House and Speaker John Boehner. As talks repeatedly collapsed, financial markets began to tremble. In late July 2011, stock indices fell sharply and bond markets showed signs of panic. Major business leaders and the U.S. Chamber of Commerce begged Congress to act, warning that even the threat of default was destabilizing.
Standard & Poor's issued warnings and followed through by ** downgrading U.S. credit from AAA to AA+** . It was the first downgrade in American history. S&P cited political dysfunction in Washington as much as fiscal imbalance. The downgrade shocked global markets, though U.S. Treasuries remained the world's safest asset.
At the last moment, Congress passed the Budget Control Act of 2011. The law raised the debt ceiling in exchange for two provisions:
About $1 trillion in immediate spending cuts spread over ten years.
A “super-committee” tasked with finding another $1.2 trillion in deficit reduction
If the super-committee failed, the law imposed automatic across-the-board cuts called the sequester. It was designed to be so unpalatable that both parties would be forced to compromise.
That assumption proved wrong. The super-committee deadlocked, and the sequester took effect in 2013, bringing sweeping cuts to defence and domestic spending. Almost nobody in Washington had wanted those cuts, but the Budget Control Act's machinery left no choice.
The crisis damaged Obama politically in the short term, making him appear weakened by the brinkmanship. But it also exposed deep fractures within the Republican Party.
The Suspension Game
Year 2013 brought a clever trick. Don't raise the ceiling. Just suspend it. Pretend it does not exist until a specific date. This avoided picking a number. Republicans could say they did not raise it. Democrats got borrowing room. Everyone saved face. The 2018 and 2019 suspensions kept this going. It became the new normal. Why fight over numbers when you can just pause?
Biden and Beyond
Biden got a traditional increase in 2021. Added $2.5 trillion more to debt. No drama. Markets liked the certainty. The 2023 deal was messier . McCarthy needed Republican votes. Biden needed to avoid default. They suspended the ceiling until January 1, 2025. When the ceiling came back, debt was $36.1 trillion. In July 2025, Congress again raised it to $41.1 trillion. It was Ironically called the * One Big Beautiful Bill Act* (OBBBA). Officially, the bill is H.R. 1 enacted by the 119th U.S. Congress and effectively it raised the ceiling of debt by 5 trillion dollars.
Every stand-off follows a pattern. Politicians posture. Markets panic. Business leaders make phone calls . A deal appears at the last second. The ceiling never actually constrains spending. It just creates crisis moments. Politicians use these for leverage. The real question is not whether it will be raised or not. The question is how much pain happens first.
Who will pay the debt?
The soon to be $41 trillion debt will be serviced by taxpayers through interest payments and rolled over through new borrowing. The Treasury’s Fiscal Data page reports interest expense reaching about ** $1.1 trillion** (2025, through Aug 31, 2025). The burden falls mainly on American taxpayers and future generations, because:
Taxes collected are used to pay interest.
If debt grows faster than the economy, future taxpayers face either higher taxes or fewer services.
Inflation or rising prices can also act as a hidden “payment,” since it erodes the real value of outstanding debt.
It is not like a household loan that must be cleared someday. It is a permanent feature of modern government finance. That would be the official answer. Reality is something different. We will discuss it in a different chapter.
Thus, the interest payment on debt by the USA exceeds the d efence spending by the USA, which is a perilous turn of event. In history, whenever this happens, an economy loses global trust. It is also called the Ferguson effect. In history several empires faced decline when debt servicing overtook defence spending:
Habsburg Spain : By the 17th century, Spain's debt servicing consumed more resources than its military expenditures, leading to fiscal crises and diminished global influence.
Ancient Régime France : In the 18th century, France's mounting debt, exacerbated by wars and lavish spending, strained its economy and contributed to the French Revolution.
Ottoman Empire : The empire's prolonged military engagements and debt accumulation in the 19th century weakened its economic foundation, hastening its decline.
British Empire : Post-World War II, Britain's debt servicing obligations grew, limiting its capacity to maintain global military commitments and leading to are-evaluation of its imperial role.
Does the Empire of America is looking at its downfall or is this the beginning of that downfall? Let’s return in time and now seethe fall of the British Empire. The mighty empire in which the sun never set, had to seek an IMF bailout in 1976. Maybe it will give us a hint about the debt crises in the USA.
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