Negotiations continue in the United States between political parties to find a solution to the issue of the need to raise the debt limit so that the world’s largest economy does not have to suspend meeting obligations until an agreement is reached.
With the clock ticking down to the deadline early next month, The Liberal Globe presents some of the most important questions and answers about the US debt limit.
- What is the US debt limit?
The United States Congress first introduced the concept of the debt ceiling in 1917 – the maximum amount of money the government could borrow. New Public Debt Acts were subsequently passed in 1939 and 1941.
Over the past seven decades, the debt ceiling has been raised 78 times, including in 2011 when a delay in agreeing on a new limit resulted in the US losing its top AAA credit rating, causing borrowing costs to rise.
- Is the situation a threat of actual bankruptcy?
Because the US needs cross-party agreement to raise the limit, the risk is of a so-called technical default arising from disagreement between political parties rather than an actual default. Essentially the US has or can find the money to cover its current obligations.
- Why don’t the two parties immediately agree again?
A standoff is underway between Democrats and Republicans, with the latter seeking the US government to agree to sweeping cuts in public spending and other reforms.
- Has the limit already been exceeded?
The current debt limit of $31.4 trillion (or €28.6 trillion at today’s exchange rate) has already been exceeded as of January 2023, but the Treasury has taken emergency measures to allow it to continue financing the government’s operations.
The next key deadline is set for early June, and by then Congress must raise the ceiling again, or the US government could start to technically run out of cash and be unable to repay debt.
- What will happen to the US without a deal?
The US Treasury Department has warned that in such a case the federal government may not be able to pay all of its debts.
Without raising the debt limit, the US government will be unable to service obligations, with potentially very negative consequences as long as a solution is not found. Federal workers would be laid off, global stock markets would take a hit, and the US economy would likely fall into recession.
A lack of funds would force the US Treasury to likely prioritize spending so that debt payments and interest payments come first.
This could mean delays in paying the wages of tens of millions of public sector workers.
While any debt default would likely be temporary, an analysis by Biden’s economic advisers warned that even a “short” default would cost the US economy 500,000 jobs.
A “prolonged” default would result in a 6% drop in GDP with the loss of tens of thousands of businesses and about 8.3 million jobs — almost as many as during the 2008 financial crisis.
- How would a US debt default affect the global economy?
US Treasury Secretary Janet Yellen has spoken of “financial and economic chaos” from any failure to raise the debt ceiling.
In a worst-case scenario, in which the US would have to completely stop borrowing by July or August, that would hit global financial markets.
Investors would question the value of US bonds, which are considered among the safest investments and serve as a mainstay of the global financial system.
A more prolonged technical default would cause the US dollar to fall sharply. Global inflation could rise again and supply chain problems, which have limited trade after the COVID-19 pandemic, could be exacerbated by a lack of confidence in the financial system.
