The US is once again poised to bump into the country’s debt limit.
That means the government can’t borrow any more money unless Congress agrees to suspend or change the ceiling, which currently stands at nearly $31.4 billion.
Typically that happens.
Since 1960, politicians have attempted to raise, extend or revise the definition of the debt limit 78 times – three of them in the last six months alone.
But fresh tensions in Congress, where Republicans recently took control of the House and are demanding spending cuts, have raised concerns that politicians will delay action this time – potentially leading the US to deliberately for the first time in its history become insolvent.
So what would happen?
For most of us, the impact is unlikely to be noticeable – at least for the first few months.
The US Treasury can manage the situation by taking so-called “extraordinary” measures to avoid actually exceeding the limit. In the past, that has included steps such as suspending investments it was supposed to make in pension and health plans for federal employees, and later replenishing those funds.
But even delays have a real cost.
The standoff over the matter in 2011 prompted rating agency S&P to downgrade the country’s rating – a first for the US.
Government analysts have estimated that delays this year caused the US Treasury’s borrowing costs to rise by at least $1.3 billion as investors demanded higher interest rates amid uncertainty.
Analysts expect that the debate on this topic will make the financial markets nervous as early as this year.
Treasury Secretary Janet Yellen has estimated that emergency measures can buy the US until at least June, when the government will be unable to pay its bills.
This is the scenario that many analysts see as a true economic catastrophe.
Some say that in this case the authorities would have to do everything possible to avoid a default. That would mean finding ways to make interest payments while leaving other obligations unpaid, such as B. Payments to defense contractors; Social Security checks received from retirees across the country; and salaries of government employees, including the military.
Even something as simple as weather forecasts could be affected since so many rely on data from the government-funded National Weather Service.
A default could ruin the country’s credibility and roil global financial markets, where US debt is heavily traded and traditionally viewed as low-risk.
The dollar would weaken and the cost of borrowing would rise—first for the government, but ultimately for the general public in the form of higher interest rates on mortgages, credit card debt, and other borrowing.
Reaching that point would be unprecedented and would do far-reaching damage to consumer confidence and the economy, which is already in a precarious state.
“Failure to meet government commitments would do irreparable damage to the US economy, the livelihoods of all Americans and global financial stability,” Ms Yellen recently warned.
The debt limit was first introduced in 1917 to give the government flexibility in raising funds during World War I. In theory, it gives Congress a way to review spending.
But battles over the ceiling are intensifying as political polarization deepens and US debt has skyrocketed, roughly doubling in a decade.
That’s partly due to high government spending during the financial crisis and pandemic – but it also reflects the fact that the country has run a budget deficit every year since 2001 – spending more than it took in.
Now the debt ceiling is an eternal political leverage.
The 2011 debt limit dispute was settled when then-President Barack Obama approved more than $900 billion in spending cuts – and raised the debt limit by a similar amount.
Some Republicans are again pushing for spending cuts this time — a position Democrats have rejected.
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