Treasury Secretary Janet L. Yellen recently said that the United States could run out of money to pay its bills by June 1 if Congress does not raise or suspend the debt, putting pressure on President Biden and lawmakers to reach a swift agreement to avoid defaulting on the nation’s debt.*
Congress has authorized trillions of dollars in spending over the last decade, causing the United States’ debt to nearly triple since 2009. Over that period, the Treasury Department’s ability to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing known as the debt ceiling.
Created by Congress in 1917, the debt limit, or ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. The U.S. government has run a deficit averaging nearly $1 trillion every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow to continue to finance payments that Congress has already authorized.
Congressional action to raise the debt ceiling does not increase the nation’s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.
What would be the consequences if the United States breaches the debt ceiling?
The debate over the debt ceiling has caused economists such as CCFR’s Roger Ferguson the once unthinkable prospect of a U.S. default—that is, Washington declaring that it can no longer pay its debts. Some analyst say that would herald chaos for the U.S. and global economies. Even short of default, hitting the debt ceiling would hamstring the government’s ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession. Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. According to center-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.
“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Treasury Secretary and former Federal Reserve Chair Janet Yellen wrote Congress in January 2023.
Could breaching the U.S. debt ceiling bring down other markets?
Analyst say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world’s reserve currency. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and thus weaken the dollar.
Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt crises.
Does the government have any options if the ceiling is not raised?
If congressional negotiations over the debt ceiling are not resolved before the ceiling is reached, the Treasury can stave off a default for several months with a series of temporary actions it calls “extraordinary measures.” These include suspending payments to some government employee savings programs, underinvesting in certain government funds, and delaying auctions of securities.
*The New York Times May 9, 2023