Wall Street Times

Debt limit: What happens if the US defaults?

Image Source: Bloomberg

The US is about to reach the limit on how much debt the country can have.

This means that the government can only borrow more money if Congress agrees to change or remove the limit, which is almost $31.4 billion.

That’s what happens most of the time.

Since 1960, politicians have tried 78 times to raise, extend, or change what the debt limit means. In the last six months, they have tried three times.

But new tensions in Congress, where Republicans recently took control of the House of Representatives and are calling for spending cuts, have made people worried that politicians won’t act this time, which could lead the US to default for the first time in its history intentionally.

So, what would happen?

How can the US ensure it doesn’t exceed its debt limit?

At least for the first few months, most of us should notice the change less.

The US Treasury can handle the situation by taking “extraordinary” steps to avoid exceeding the limit. In the past, the government needed help to make the investments it was supposed to make in retirement and health benefit funds for federal workers and had to add to those funds later.

But being late has real consequences.

The S&P credit rating agency lowered the country’s rating for the first time in US history in 2011 because of the disagreement over the issue.

Analysts from the government say that the delays that year caused investors to ask for higher interest rates, which drove up the cost of borrowing for the US Treasury by at least $1.3 billion.

Analysts already think the debate over this issue will make the financial markets jumpy this year.

Then, the economy crashed.

Treasury Secretary Janet Yellen thinks that special measures will buy the US time until at least June, after which the government will no longer be able to pay its bills.

Many economists think this would be the worst thing for the economy.

Some people say that if this happens, the government must do everything it can to keep from going into default. That would mean paying interest while other bills, like payments to defense contractors, Social Security checks sent to retirees across the country, and salaries of government workers, including the military, go unpaid.

Even simple weather forecasts could be changed because so many people use data from the National Weather Service, which is paid for by the government.

The country’s trustworthiness could be ruined by a default, which would also shake up the world’s financial markets, where US debt is heavily traded and is usually seen as low risk.

The dollar’s value would go down, and the interest rates on mortgages, credit card debt and other loans would go up. So at first, the government would have to pay more to borrow money, but everyone else would have to pay more in the long run.

This has never happened before, and if it did, it would hurt consumer confidence and the economy, both of which are already in a bad place.

Ms. Yellen recently said, “Failing to meet the government’s obligations would do irreparable harm to the US economy, the lives of all Americans, and the stability of the world’s financial system.”

Why it keep getting worse?

The debt limit was first implemented in 1917 so that the government could raise money more easily during the First World War. In theory, it lets Congress keep track of how much money is spent.

But fights over the debt ceiling are getting more and more heated as political differences grow and the US debt skyrockets, almost doubling in ten years.

Part of the reason for this is that the government spent a lot of money during the economic crisis and the pandemic. It’s also because the country has had a budget deficit (spent more money than it brought in) every year since 2001.

The debt limit is always used as a bargaining tool in politics.

2011’s fight over the debt limit ended when President Barack Obama agreed to spending cuts worth more than $900 billion, and the same amount raised the debt limit.

This time, some Republicans want to cut spending, which is an idea that Democrats don’t support.

Will the limit on the debt be raised?

People are wondering if McCarthy will be able to bring together Republican hardliners, who see a possible default as a way to force the government to cut spending, and Democrats, who don’t want any cuts. This is because there have been disagreements in the House speaker election recently.

McCarthy said Sunday on Fox that now is a good time to “look at ways we can change our behavior” because “what we’re going to do is bankrupt this country.”

But the White House said last week that it would not give in or talk about raising the debt ceiling.

House Republicans are making plans for what to do if lawmakers can’t agree on what to do about the debt ceiling. The Treasury Department will determine the most important payments based on these plans.

Will there be a shutdown?

A government shutdown happens when Congress doesn’t pass a bill to pay for the government. Also, a debt ceiling crisis happens when Congress doesn’t pass a bill to raise the debt limit.

Read Also: Britishvolt seeks bid to stave off collapse

Last month, Congress passed a spending bill for the government that cost $1.7 trillion. This stopped the government from shutting down, which would have stopped non-essential services and left many federal workers without pay. Instead, the law says that government workers will be paid for until September 30, which is the end of the fiscal year.