The U.S. government is getting closer and closer to running out of cash… for real this time.

The government has until the end of September to raise the U.S. debt ceiling – that is, the total amount the government is allowed to borrow. Otherwise, it won’t be able to pay its bills. The U.S. government spends more than it earns, and it funds the difference by borrowing.

Political infighting could result in a standoff on raising the ceiling. That would be bad news for the United States, for the global financial system and for anyone with a lingering hope that the U.S. political system is vaguely functional. But if history is any guide, it could be good for the price of gold.

One problem of indebtedness – how to borrow more

Countries have gone insolvent around 800 times over the centuries… Argentina, Puerto Rico and Greece are some of the many nations that have operated under debt repayment plans that were put into place when they were unable to make good on what they owed.

The U.S., by dint of having a global reserve currency, hasn’t had that problem. The U.S. can just print more money – an option that isn’t available to countries that don’t have a currency upon which investors place enough value.

Even if the U.S. government can print the cash it needs, though, it can’t necessarily pay what it owes, such as interest on U.S. Treasuries. The U.S. government has a limit to how indebted it can be, and it periodically hits that ceiling (as it did already in March – see below).

In the U.S., Congress (the two houses of parliament) has the power to raise the debt ceiling. But in recent years, increasing the ceiling has become more difficult. Most notably, political infighting within Congress in August 2011 nearly resulted in the debt ceiling not being raised. This reared the catastrophic possibility that the U.S. government could default on its debt.

Eventually, the ceiling was hiked. But four days after the vote to raise the debt ceiling passed, credit rating agency Standard & Poor’s downgraded the U.S. government’s credit rating from AAA to AA+.