What is the US debt ceiling? Term, Limit, Default Explained

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

It’s crunch time. President Joe Biden and House Republicans have just days to act to prevent the country from defaulting. debt. In January, the US hit its debt limit of $31.4 trillion, meaning the federal government can’t rack up more bills (or borrow more money), so paying bills on time just became easier. complicated.

How will the term of the debt ceiling affect you? It’s a trick question, so let’s peel back the layers. This is what you should know.

What is the debt ceiling?

The debt ceiling was created by Congress in 1917 and limits how much the US can borrow to finance legal obligations set by lawmakers in the past (social security, tax refunds, military pay, interest payments on debts). pending, Medicare benefits and more). In other words, it limits the amount of debt the US can incur. The current debt ceiling is $31.4 trillion.

What does it mean to hit the debt ceiling?

Reaching the debt ceiling would not be a hot topic if the country’s revenues exceeded its costs (the government receives money mainly from individual and corporate taxes, but also has other sources, such as leases on government-owned buildings and land, sale of natural resources and admission to national parks).

However, the US has not been in the green since 2001, which means that for more than 20 years, the government has had to borrow money to finance operations. Now that the US has reached its debt limit, there are two options: raise or suspend the limit so the government can pay its bills on time, or face default.

Raising the debt ceiling would be exactly what it sounds like (raising the limit the US can borrow). Suspending the debt ceiling means the Treasury can temporarily go over the ceiling and borrow beyond the current limit. If the US defaulted, the country would not be able to pay its bills on time and the economic impact would likely be felt immediately.

Related: Fannie Mae says a ‘modest recession’ is expected in the second half of the year

When is the deadline to raise or suspend the debt ceiling?

In a letter sent Monday to House Speaker Kevin McCarthy, Treasury Secretary Janet Yellen warned that it is “highly likely” Treasury will be unable to meet its financial obligations if Congress does not raise or suspend the debt ceiling as early as June 1. .

“I continue to urge Congress to protect the full faith and credit of the United States by acting as soon as possible,” he wrote.

What would happen if the United States defaulted?

In March, Moody Analytics chief economist Mark Zandi warned that if the US defaults, it would be “catastrophic” and Americans would likely pay for the default “for generations.”

For example, government workers and businesses with government contracts may not get paid on time and social security payments may stop. In a broader sense, it would also lead to “a loss of consumer and business confidence,” he said. analysts at the Brookings Institution Wendy Edelberg and Louise Sheiner.

Would a default cause a recession?

Default would essentially trigger a nationwide economic collapse and induce an “immediate sharp recession,” the Council of Economic Advisers said. warned beginnings of May.

Harry Mamaysky, professor of professional practice at Columbia Business School, said Entrepreneur that the government has “many obligations to many people.”

“At some point, when there isn’t enough money, they have to start prioritizing who to pay first,” Mamaysky said. “Someone isn’t going to get paid the money they’re owed on time, and that’s going to be detrimental.”

Related: Do bank failures and inflation make you sweat? Here are 3 marketing moves to make your business recession-proof.

However, the short-term ramifications of defaulting might not be as damaging as the long-term implications, what Mamaysky calls a “reputational issue” that could call into question the credibility of the US as a smart country with the What to do business.

“That’s the biggest risk to me: It’s not what’s going to happen this year or next, it’s that the world will perceive in five to 10 years that the US is the best country in the world to do business with.” he said. “It’s not imminent, but if Congress doesn’t follow through, they’re going to erode trust.”

On Wednesday, the main credit rating agency, Finch, placed the US’s current “AAA” rating on “negative rating watch,” meaning the country’s perfect score could be at risk of a downgrade.

“Rating Watch Negative reflects increased political partisanship preventing a resolution to raise or suspend the debt limit despite the rapidly approaching x-date (when the US Treasury exhausts its cash position and its capacity for extraordinary measures without incurring new debt)”. the company said in a statement.

How will a breach affect small businesses?

a recent report by Goldman Sachs found that 65% of small business owners would be “negatively impacted” if the US defaults on its debt. Furthermore, 90% said it was “very important” for the government to avoid default.

If the US defaults, businesses with government contracts may not see payments, and stores that have customers who rely on food stamps or Social Security to pay for necessities may see a drop in spending.

“If you’re a social security recipient and you owe rent, you may not have the money to pay your rent,” Mamaysky added. “And if your landlord owes your building’s utility bill, you may not be able to pay the utility bill because you didn’t receive rent.”

Related: 7 Savings Strategies for Small Businesses in Uncertain Economic Climates

What’s more, a 2011 New York Federal Reserve The report said that small businesses were hit the hardest during the 2008-2009 recession.

According to the report, banks become “more selective and risk averse” when lending in a recession, making it harder for people to get a small business loan.

“Small businesses, which are more dependent on external financing and tend to be riskier, are more likely to be affected by a credit crunch,” the researchers wrote.

How many times has the debt ceiling been raised or modified?

Despite the current pressure to raise or suspend the debt ceiling, it is a relatively routine practice for the US government. Since 1960, Congress has acted 78 times to raise, temporarily extend or revise the definition of the debt limit to avoid a default: 49 times under Republican presidents and 29 times under Democratic presidents, according to Treasury, adding that “leaders Members of Congress on both sides have recognized that this is necessary.

hills recent increase It was in 2021 that the debt ceiling was raised by 2.5 trillion dollars.

What is the delay to raise or suspend the debt ceiling?

McCarthy and the Biden administration are negotiating a deal to avoid a federal default. However, the two have different positions: McCarthy and House Republicans are pushing for $3.6 trillion in cuts and limits on future spending for certain programs (not specified in the bill) in exchange for raising the ceiling. of debt, while the Biden administration focuses on raising the limit and paying bills on time before agreeing to cuts.

On Thursday, the House will vote on a deal and then recess while negotiators continue to work on a deal.

“Following [Thursday’s] votes, if a new agreement is reached between President Biden and President McCarthy, members will receive 24-hour notice in case we need to return to Washington for any additional votes, either over the weekend or next week “said House Majority Leader Steve Scalise. He said, for CNN.

What is the 14th Amendment and what does it have to do with the debt ceiling?

The 14th Amendment covers equal protection and other rights like citizenship, state taxes, and what Congress can regulate. He fourth section of the Amendment, which covers the public debt, provides that the “validity of the public debt of the United States…shall not be questioned.”

Since the US has reached its debt ceiling and may not be able to pay its bills, there is a argument that, by invoking Amendment 14, Biden has the legal authority to circumvent Congress (which approves any action to raise or suspend the debt ceiling) and essentially continue to issue more debt through the Treasury and ignore the debt limit.

Biden has been supportive but cautious in invoking the 14th Amendment as a solution.

“The question is, could it be done and invoked in time so that it would not be appealed and, as a consequence, beyond the date in question and still not pay the debt? That is a question that I think is not resolved,” Biden told reporters. on Sunday, for The Wall Street Journal.

Some experts have said the measure would be unconstitutional.

“The Biden administration, even flirting with these ideas, really suggests that the administration’s fidelity to the Constitution is either questionable or opportunistic,” Philip Wallach, a senior fellow at the center-right think tank American Enterprise Institute, told the newspaper. Wall Street Journal.

Others have been a bit more blunt in their take on the idea, and Yellen says it could spark a “constitutional crisis“, and Rep. Chip Roy said that if Biden went the 14th Amendment route, House Republicans “fly shit.”