Tensions are heightened as a possible default could cause havoc in the U.S. economy as early as June 5. This comes after U.S. President Joe Biden and House Speaker Kevin McCarthy reached an agreement on Saturday about the U.S. government's $31.4 trillion debt ceiling, one that would lift the limit for two years while making major cuts in government spending.
“It is an important step forward that reduces spending while protecting critical programs for working people and growing the economy for everyone,” Mr. Biden said. “And the agreement protects my and congressional Democrats’ key priorities and legislative accomplishments. The agreement represents a compromise, which means not everyone gets what they want.”
Since Monday, Biden and McCarthy talked to one another about possible resolutions to the debt ceiling, only for the agreements to fail.
In a statement from The White House, Biden emphasized the need to avoid possible disaster in the economy and mentioned that a bipartisan agreement is necessary for the economy to move forward without reaching a default.
“While there are areas of disagreement, the Speaker and I, and his lead negotiators Chairman [Patrick] McHenry and Congressman [Garret] Graves, and our staffs will continue to discuss the path forward,” Biden stated.
U.S. Treasury Secretary Janet Yellen stated in a letter to Congress that a resolution needs to be met before June 1, also known as the “X date” deadline.
“We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence,” Yellen wrote, citing the risen costs for taxpayers to borrow money short-term and the negative effects of the country’s credit rating from previous instances.
As June 1 is slowly creeping along, many citizens are plagued with the question, what exactly is the U.S. debt ceiling?
The United States debt ceiling is a limit set by Congress that serves as the overall amount of funds the U.S. Treasury can borrow. According to the U.S. Department of The Treasury, the authorized funds are not dedicated to new spending and are “to meet its existing obligations” through the use of savings bonds and bills. Some of the funded agreements are Social Security and Medicare benefits, military salaries, interests on national debts, and tax refunds. The U.S. would need to borrow large sums of money as the country utilizes budget deficits.
A 2015 Congressional Research Service report describes the debt ceiling as an “aggregate figure that applies to gross debt,” incorporating debt of the accounts of the intra-government and the public. However, the report stated that half a percent of the debt is not included in the ceiling as of 2013.
Since the creation of the U.S., Congress was able to approve each debt that was issued. In 1917, the Second Liberty Bond Act was issued with allowed Congress to develop a limit or ceiling on the total number of bonds that could be issued. The ceiling eventually transitioned to serve as the culminated limit of almost all federal debt.
The U.S. Treasury stated on its website that Congres was able to resolve debt concerns swiftly when the debt ceiling needed to be increased, a total of 78 times since 1960.
“49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary,” the statement read.
Although many suggest that the debt ceiling affects the government’s shortfalls directly, that is not the case.
It only prevents the Treasury from continuing its ongoing commitments once the limit is reached, which would result in the U.S. defaulting on its debt.
If the U.S. reached its limit, what would happen next?
As of January 19, the country has hit its limit. This led to the Treasury Department to undergo “extraordinary” measures to continue making payments and fulfilling the government’s obligations. Though it does not end the fear of defaulting payments, it gives the U.S. more time to avoid the worst possible scenario until June, or whatever the ‘X date’ may be.
Some of the measures include halting the government’s investments in pledges like the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.
Money can also be moved between government departments and agencies temporarily during these rare maneuvers in order to meet certain deadlines for payments as they come.
Though managing the country’s finances in this matter leads to higher risks in the long term, according to Assistant Treasury Secretary Joshua Frost.
During the Federal Reserve Bank of New York’s Annual Primary Dealers Meeting, Frost stated that there were multiple instances where there were not enough funds to meet “next-day obligations.”
Well, what happens if the U.S. reaches the ‘X date’ without a resolution?
Though the U.S. has only defaulted on its debt once in 1979, due to a computer backlog, there are only theories on what could happen if that were the case.
One of the instant effects would be the negative impact on the U.S.’s reputation with its financial responsibilities. Similar to someone having to pay higher interest rates with a poor credit score due to missed payments, the U.S. would see interest rates on its debts rise.
In theory, it would also spark a blow in the financial markets that would cumulate into a global financial crisis. A major factor would be the increased costs of money borrowing within the economy such as mortgage rates. With it, a high risk of a U.S. recession that would see the economy shrink.
Justin Wolfers, professor of economics and public policy at the University of Michigan, stated that banks might not be “on solid ground” once the economy seizes up.
“That means there’s no more borrowing,” Wolfers said. “Business stop investing and the markets go absolutely haywire.”
In addition to businesses and government workers facing economic woes head first, other basic operations such as public schools and road maintenance would also suffer greatly.
In addition, those who depend on government programs or assistance like Social Security would be directly affected by the default. Programs would see great disruptions and leave individuals to fend for themselves.
Though there is still time left on the clock, it is critical that the U.S. is able to a solution to fund itself away from an economic catastrophe.
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