Deficit and debt ceiling | American civics | US government and civics | Khan Academy


Before we talk about
the debt ceiling, it’s important to
realize the difference between the deficit
and the debt. Because these words
are thrown around and it’s clear that they’re
related, but sometimes people might confuse
one for the other. The deficit is how
much you overspend in a given year,
while the debt is the total amount, the
cumulative amount, of debt you you’ve gotten
over many, many years. So let’s take a look, I guess
a very simplified example, let’s say you have
some type of a country. And that country spends,
in a given year, $10. But it’s only bringing
in $6 in tax revenue. So it’s bringing in taxes. It’s only bringing in $6. So this country in this
year, where it spends $10, even though it only has $6 to
spend, it has a $4 deficit. Def is the short for deficit. And well, let me
just write it out. You might think it’s
defense or something. It has a $4 deficit. And you might say,
well, how does it spend more money
that it brings in? How can it actually
continue to spend this much? Where will it get the $4 from? And the answer is, it
will borrow that $4. Our little country
will borrow it. And so the debt, maybe
going into this year, the country already
had some debt. Maybe it already
had $100 of debt. And so in this
situation, it would have to borrow
another $4 of debt. And so exiting this year,
it would have $104 of debt. If the country runs the same
$4 deficit the year after this, then the debt will
increase to $108. If it runs another $4
deficit, than the debt will increase to $112. Now that we have
that out of the way, let’s think about what
the debt ceiling is. So you could imagine, the
United States actually does. It’s continuing
to run a deficit. It’s continuing to spend
more than it brings in. And actually, for
the United States, these ratios are appropriate. For every dollar that the
United States spends right now, 40% is borrowed. Or another way to
think about it, it only has 60% of
every dollar that it needs to spend right now. So it has to go out into the
debt markets and borrow 40% to keep spending at
its current rate. And so if it’s
continuing to borrow, you could imagine that the
debt keeps on increasing. So let me draw a
little graph here. So that axis is time. This axis right over here is the
total cumulative amount of debt that we have. We continue to have to
borrow 40% of every dollar that we’re spending. And so our debt is
continuing to increase. And Congress has the power,
or Congress has the authority, to essentially limit
how much debt we have. So right now we have a current
debt limit of $14.3 trillion. And even though Congress
has this authority, the way that it’s
worked in the past, is this kind of
just a rubber stamp. Congress has just always allowed
the debt ceiling to go up and up and up to fund
our borrowing costs. And if you think about
it, that kind of makes sense because right
now Congress is the one that decides
where to spend the money. What are the obligations. And so the debt
ceiling is like, OK, we’ve already agreed what you
have to spend your money on. Congress is the one that figures
out what we spend our money on, and what our taxes are. And so they say,
look, we’ve already determined how much
you have to borrow. It would seem kind of ridiculous
for us after we’ve determined how much you borrow to say
that you cannot borrow it. You cannot you cannot actually
do what we’ve told you to do. And so historically,
Congress has just kind of gone with the flow. They said, OK,
yeah we’ve told you we need to borrow more
money to execute– the executive branch has to
run the government– for you to actually run the
government based on the budget we told you. So they just keep upping it. And the last time the
debt ceiling was raised was actually very recently,
February 12, 2010. It was raised from
$12.3 trillion, point actually $12.4 trillion
to the $14.3 trillion. And this happens
pretty regularly. It’s happened 10 times since
2001, 74 times since 1962. So it’s just a regular
operating thing. And right now the Obama
administration says, look, we’ve actually come up
against our debt ceiling. We want to raise it, and ideally
for the Obama administration, they want to raise it
by about $2.4 trillion. So they want to raise
it to $16.7 trillion, which will kind of put it off
the table for a little bit. Put it past the
elections so that we don’t have to
debate this anymore. The Republicans on
the other the side, want to essentially
use this, and this is a little bit unusual,
to use this as leverage to essentially
reduce the deficit. And not only to
reduce the deficit, but it’s in particular to reduce
the deficit through spending cuts. And so that’s why it’s become
this big game of chicken and why we’re going
up against this limit. Now, one thing that you
may or may not realize is that we’ve
actually already hit the debt limit, the
current debt limit. And we hit that debt
limit on May 16, 2011. I’m making this video at
the end of July in 2011. And the only reason why
the country’s continuing to operate, and the only
reason why the country has been able to continue to pay
interest on its obligations, and pay issue social
security checks, and support Medicare, and buy
fuel for aircraft carriers, and all the rest,
is that Geithner, who’s the Treasury
Secretary, has been able to find cash in other
places, cash normally set aside for employee pensions
and all the rest. And has essentially done a
little bit of a bookkeeping, taking money from one
place to feed another. But what he said, what
he’s publicly said, is that he won’t be able to do
that anymore as of August 2, 2011. So this right here is
the date that everyone is paying attention
to, August 2, 2011. According to Geithner,
at that point, he won’t be able to find random
pockets of cash here and there and shuffle it around. And what he calls
extraordinary measures. And at that point,
the United States will not be able to fulfill
all of its obligations. And so if you think about all
of the obligations of the United States, this is a huge
oversimplification here. So this bar represent
all of the obligations. Some of those obligations
are things like interest on the debt that
it already owes. It already owes a huge amount
of debt, $14.3 trillion. And things like social security,
Medicare, defense, and then all of the other stuff that
the country has to support, all of their other obligations. So if as of August 2, 2011,
we cannot issue any more debt, and Geithner doesn’t have any
extra cash laying around with these extraordinary
measures, then, if those are the only
options on the table, The only option is to somehow
reduce some of these things by 40%. Because 40% of
every dollar we used to spend on all of these
obligations, 40% are borrowed. And so something over
here is going to give. We’re not going to fulfill
our obligations to one or more of these things,
all of these things that we are legally
obligated to fulfill. That Congress has said,
these are the things that the United States should
be spending its money on. And so at that point,
it is perceived that we would have to default. And a default actually would
be on any of its obligations. But in particular, we
could be, especially if we have to cut
everything by 40%. And we don’t want
to see retirees not be able to get evicted from
their houses, or aircraft carriers not have
fuel, or whatever else. We might defer, or
try to restructure, or do something
weird with our debt. In which case, we
would be defaulting. And I want to be clear,
a default, it’s usually referred to not fully paying the
interest on debt that you owe. But a default would be
any of its obligations. The United States
has this AAA rating. If the United States says it’s
going to give you a Social Security check, you trust that. If the United States
says that it’s going to pay for that Medicare
payment, you trust that. If it says it’s going to
give you an interest payment, you trust that. All of a sudden, if
United States does not fulfill any of those
obligations, then all of the obligations
becomes suspect. And the reason why this is a
big deal, as you can imagine, if you borrow money, you’ve
always been good at paying back that money, you’re
going to pay lower interest than other
people would have to pay. But all of a sudden,
for whatever reason, one day you default. You either delay
your payment, or you say you don’t have the
cash to pay your payments, then people’s like, wow
you’re a much riskier person to lend money to. So now I’m going to increase
the interest rates on you. And so the perception
is if the United States were to default on its debt,
or any of its obligations, that interest rates would go up. And the reason why this
would really not great is because it would make
the debt and the deficit even worse. Then this chunk is
going to have to grow. Our obligations are on debt. As new debt gets
issued, we’re gonna have to pay more
and more interest. So it’s going to just
make matters worse. It’s going to make
the deficit worse. And on top of
that, it’s not just that the government’s debt, the
interest on the government’s debt will go up, but interest
on all debt in the United States will probably go up. Because government debt is
perceived to be the safest, it’s the benchmark. A lot of other debt
contractors are actually tied to government debt. So you’ll have interest rates
throughout the economy go up, which is exactly
what you do not want to happen when you are
either in a recession, or when you are recovering
from a recession.

35 Replies to “Deficit and debt ceiling | American civics | US government and civics | Khan Academy”

  1. Inclusion of Social Security in list of items that might have to be cut is interesting because it is SUPPOSED to be a stand alone fund. But it has been regularly raided over the years to pay for other things. Yes, it's filled with federal IOU's, but as this little video shows, will it ever be paid back. Unsustainable spending.

  2. Hmmm…interesting. I wonder why he didn't include a point on the graph indicating when ppl will start freaking out and killing each other…;)

  3. Until I read your comment I thought that political brainwashing was just a joke. Now I am certain that it's true. Leftists ATTEMPT to reach debt? They want to accrue as much debt as they possibly can?

    Laughable. Just like your credibility.

  4. Were there unexpected expenses that caused us to need more money to fufill our obligations? Or do we just naturally need to be raising the debt ceiling? Are there countries that lower debt ceilings? How is this done? Did republicans use this debt ceiling idea purley to affect the presidential race?

  5. "Leftists spending"? Like what? Healthcare, education, transportation, and infrastructure? Yeah, I'll take that over the endless wars Republicans want.

  6. LOL
    Obama has been bombing more countries than Bush so far. His first 4 years, he bombed Pakistan, Afgan, Yemen, Somalia, and Libya while Bush bombed Iraq and Afgan…

    The thing is Obama make it worse. What a naive fool. Why do you think the debt goes sky rocket faster than Bush time of 8 years?

  7. The only difference between your and those countries you mention is they don't spend as much money on every darn program that US seem to come up endlessly. Also, they don't put as much money bombing people around the world.

    I hate to break it to you, but Obama bombed more countries than Bush whether you like it or not.

  8. So pretty much everything Ron Paul warns about the debt ceiling is true…. and the GOP gave coronation to Mitt to automatically lose to Obama…..

    Well, we will be investing in gold, oil and silver more over here in Asia continent just in case you Americans go broke due to super hyper inflation. (like how we've been doing for the past years, but we will invest more this time).

    Good luck to us all. LOL

  9. shouldn't the US reduce it's spending instead of defaulting? Like selling a couple of aircraft carriers to the UK or something.

  10. Since we're taking about reality, I think it is important not forget that the monetary system itself is one conceived of absolutely no material value. Money and fractional reserve banking are what keeps society enslaved. Debt is conceived the moment the government exchanges treasury bonds (paper) for bills (paper). With compounding interest acting as the nipple from which the debt feeds, how is anyone supposed to get out of debt? It is not a matter of Left or Right, just simple economics.

  11. You people are such idiots. Most of you are probably Ron Paul zombies that haven't ever even glanced at an economic scholarly journal.

  12. How about cut some spending on military? This is a new world. a world with the hope and chance that noone fears another. A place of safety without guns.

    If the US drops 40% of it's military spending, it will guaranteed have not just enough money to kill debt, but feed the poor EVERYWHERE

  13. You are actually right. Let's say they don't pay a cent for war, that spending alone would have save his all time high record of debt from 2008.

    He's the commander in chief, remember?

  14. The problem I have with the Libya war is not how appropriate it is to intervene, but it's the procedure of how the US did it to justify the rest.

    If it is necessary to declare war, it should have been done base on the country's decision and that is congress and not UN. The reason why it was ended quickly may have other hidden factors such as wars in other countries, the rate of replacing regime was fast, etc.

    Nevertheless, these tyrants are usually born from US interference. It's not cheap

  15. No. Drop Obamacare, it is ruining the health system. My cousin is a doctor of natural medicine and he is now doubting it because of the 7 foot tall regulation package from Obamacare. You might not get that life saving treatment for your mom or dad in the future if they need something fixed. It's all in the liability and the premiums skyrocketed in some states to over 150% Not to mention how do suggest we get rid of guns? lol force people at gunpoint to disarm themselves?

  16. My friend said every member of Congress should be FORCED to watch this video so they can figure out that a damn deficit isn't solved like a household budget.
    He cracks me up. He's been angry at the Speaker of the House ever since the Speaker shut down the government. He even went to the guy's Facebook page, called him an idiot and proceeded to point out that a deficit isn't the same as a household budget.
    He thinks the guy doesn't know a damn thing about it.
    I told him I don't know a thing about it either; he said I'm not in a position where I'm supposed to know.
    That's good bc no matter how many times he explains this stuff too me, a month later I have no memory of retaining it. I have to hear it repeatedly for the rest of my life apparently.

  17. You never pay off all your debt you just keep it manageable to want to cut the nations debt by 40 % of the deficit is to pay off all your debt. all you need to do is cut it by 10% as the interest rates go up.
    and that is easily done just cut the waste fraud and abuse in the system then get rid of big government we are a nation run by the people when you have big government it is the people run by government.
    Americans own 75% of the us debt that means big government is putting every American in debt.
     I think your share is now $56,000,000.  that is every American owes.
     If our government called in its debts do you have your share or are you ready to go to debtor prison and sent to mars,
    That is what they did back in the day all the debtors were sent to colonize new lands.

  18. Barack Not that Hussein Obama that increased $8.15 trillion dollar debt during his presidency so far and more to come. When Barack Obama took the oath of office, the U.S. national debt was 10.6 trillion dollars. Today, it has surpassed the 18 trillion dollar mark which will never be paid off unless we sell US territories. This stupid country is going to hell faster than I expected.

  19. I don't know why the heck American political class want to cut the spending there's a simpler way to solve the deficit just tax the 1% the way it was done in golden days.

  20. You PAID INTO SOCIAL SECURITY AND MEDICARE. I'm TIRED of people LYING and saying it's a "social" program. Social my eye. The money wouldn't even be there if I hadn't paid FICA. I didn't get that back and I'm the one who worked for it.

  21. why the every video of urs work fine on my phone but on my pc there's no sound , my pc specs are super high just to know ,
    also other youtube videos also work fine just urs

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