RE:RE:RE:US Debt Ceiling - Should We Worry? Budget deficits are in fact inflationary.
When the debt ceiling is raised, the government has to replenish its Treasury General Account. It can come from 3 sources and I'll elaborate on each one.
1) The Federal Reserve can print more money. This is out of the question at this point.
2) The commercial banks are the principal owners of the Government debt. Bank reserves go down and collateral/bond purchases go up. The liability side of the commercial bank remains unchanged.
3) The private households purchase the debt. In this case, bank deposits go down and whatever happens to the bank liability side of the balance sheet must be reduced by the same amount on the asset side. In other words, bank reserves go down.
In both cases 2&3, bank reserves go down which implies that banks and/or households have less liquidity to do transactions with each other.
Raising the debt ceiling is a drain on liquidity and when combined with quantitative tightening can easily cause a recession.