TODAY   |  April 11, 2011

Exactly what is this  debt ceiling?

CNBC’s Erin Burnett and Jim Cramer explain what the debt ceiling is, how it affects the economy and why it matters to ordinary Americans.

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This content comes from Closed Captioning that was broadcast along with this program.

>> more. exactly what is the debt ceiling and why does it matter to you? here to explain jim cramer and ea erin burnett . what is it?

>> this is how the nation pays our bills. we borrow money to pay the bills. you have one shot at it and if we don't raise the debt ceiling we'll default. look at greece, portugal. these are countries on the verge of default.

>> erin, the debt ceiling is $14.294 trillion as of just a few minutes the national debt clock shows us that right now it's at $14.286 trillion, increasing by the second. why does it go up so quickly?

>> because of all the obligations we have. the debt ceiling -- we have social security , medicare, all the entitlements, defense. everything you spend comes out of there. the problem is what you pay every month out of your paycheck in taxes is way smaller.

>> a fraction.

>> that difference is what we borrow.

>> when people heard a week worth of talk over this battle and heard $38 billion will be cut from the budget and they say, why is the debt going up so quickly, how are they related or not?

>> first of all, as you point out that's a drop in the bucket. the amounts are a drop in the bucket. they are related but to tackle the issue we have to tackle entitlements. you lookt medicare and social it's 40% of the budget. unless we decide they can't go up so quickly, we need more means testing, those are the questions to answer but not playing chicken with the debt ceiling.

>> jim, according to estimates, somewhere in may we will reach that debt ceiling.

>> right.

>> what happens the minute we hit it?

>> they will try to extend it to july but rating agencies, the s&p, moody's, these determine how much you can borrow. they will suggest you shouldn't invest in u.s. debt if you are chinese, arab. we don't buy it. the chinese, the middle east buy it. they should say, why not buy the debt of the germans or the french.

>> so we lose our abilitile y to borrow money, pay our bills. what's the effect on the overall economy at a fragile time for recove recovery?

>> it becomes more expensive to borrow. mortgage rates , credit card rates go up. we are a very wealthy country. if you look at our assets we could pay down the debt tomorrow. we borrow because they are low interest rates .

>> it's easy.

>> our country has the ability to borrow. and to choose to borrow and pay it down later.

>> but that can go away.

>> that's the risk we have now.

>> are we like lly to see a major compromise?

>> everyone is playing with fire . we are no better than the european countries that are in trouble if we can't get this debt ceiling.

>> jim cramer , erin burnett , catch their shows on cnbc. " mad money " at 6:00 and 11:00 eastern time and erin on "sidewalk on the street" and " street signs at 9:00 a.m . and 2:00 p.m . eastern time .

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