What the Federal Debt Ceiling Showdown Could Mean for You

Time is running out for the federal debt ceiling.

Lawmakers have until the end of this month to raise the debt ceiling again. In a Wall Street Journal editorial Sunday, Secretary of the Treasury Janet Yellen said failure to act could trigger economic disaster.

While the legal cap on how much the United States can borrow doesn’t affect what consumers can spend, if Congress doesn’t reach agreement on a new debt limit by October, it will will have everything in hand, from government payments to the ability to borrow, she warned.

“Within days, millions of Americans could be out of money,” Yellen said.

“Nearly 50 million seniors could stop getting Social Security checks for a while. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays.”

Why the Federal Borrowing Limit Keeps Rising

Federal debt is the amount of money the government currently owes for expenses such as Social Security, Medicare, military salaries, and tax refunds.

The debt limit allows the government to finance these existing obligations.

“Raising the debt ceiling does not allow additional spending of taxpayers’ money. Instead, when we raise the debt ceiling, we are effectively agreeing to increase the country’s credit card balance. “Yellen said.

Congress and the White House have changed the debt ceiling almost 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling rose from less than $1 trillion to nearly $3 trillion. During the 1990s it doubled to nearly $6 trillion, and doubled again in the 2000s to over $12 trillion.

In 2019, Congress voted to suspend the debt ceiling until July 31, 2021. Now the Treasury uses temporary “emergency measures” to buy more time so the government can continue to pay its obligations to bondholders, veterans, and Social Security recipients.

But once the government exhausts these measures, it will no longer be able to issue debt and could run out of cash.

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Of course, the US government has never defaulted on its debt, nor should it this time around either. However, the threat of default has been raised several times. And even that has its consequences.

Some economists had hoped Senate Democrats would include a debt ceiling increase as part of the $3.5 trillion spending plan.

However, the budget resolution omitted the ceiling entirely, and the government will be on the brink of failure just as Republicans and Democrats clash over the amount of federal spending.

“It’s a chicken financial game,” said Mark Hamrick, principal economic analyst at Bankrate.com.

Why only the threat of default has consequences

In the worst-case scenario, the federal government would, at least temporarily, default on some of its obligations, including Social Security payments, veterans’ benefits and federal worker wages.

In addition, potential US credit rating downgrades would hammer treasures. Demand for US Treasury bonds could fall if they are no longer seen as a reliable, safe-haven investment, and bondholders would demand significantly higher interest rates to compensate for the increased risk.

This, in turn, would drive up other borrowing costs, including credit card, car loans and mortgage rates (which are usually pegged to US Treasury yields).

At the very least, fear of a default could rattle the stock market and send shockwaves throughout the economy, according to Bankrate’s Hamrick.

“If you go back to ten years ago, there was an immediate sell-off in the financial markets – it hit investors hard and posed the risk of a cascading financial crisis,” he said.

We have learned from past debt limit standoffs that waiting until the last minute to suspend or increase the debt limit can cause serious harm.

Janet Yellen

treasury secretary

In 2011, an impasse over the debt limit in Congress brought the country very close to default before lawmakers finally struck a deal, but not without a downgrade in the country’s credit rating and significant volatility in the market. Marlet.

Between July and October of that year, S&P500 sunk by more than 18%.

This time, lenders can start tightening their standards ahead of time to reduce their exposure – or risk – in what could be a contentious battle, said Yiming Ma, assistant professor of finance at Columbia University Business School.

“No one thinks it will be a simple default, but even the uncertainty can impact borrowing terms and loan availability,” she said.

“If I was someone about to take out a loan, I would look at the terms now,” Ma added. “In the last few days, there might be a frenzy going on.”

“We have learned from past debt limit stalemates that waiting until the last minute to suspend or increase the debt limit can seriously damage business and consumer confidence, increase short-term borrowing costs for taxpayers and negatively impact the credit rating of the United States,” Yellen also wrote in a letter to House Speaker Nancy Pelosi earlier this month.

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Darcy J. Skinner