The U.S. Government could default on its loans within weeks, putting millions of Americans’ and businesses’ payments at risk.
Treasury Secretary Janet Yellen warned the country last week that it could run out money as soon as June 1, if lawmakers do not increase or suspend the nation’s borrowing limit.
“This would be a big hit to the economic system and a real catastrophe,” Yellen said on CNBC Monday. “If Congress does not raise the debt limit, the president will be forced to make decisions about how to use the resources that we have. There are many options but none are good.” “Every option is bad.”
What is the debt limit, which is used by politicians as a football? And how would it affect Americans if Congress failed to raise the cap.
The federal government’s debt limit, currently at around $31.4 trillion dollars, is the maximum amount that it can borrow for the public. This includes Social Security, Medicare, military salaries, and tax refunds.
Treasury will be in uncharted waters if Congress fails to raise the debt ceiling. It would not have enough cash to pay bills, including those to Social Security recipients, government workers, or servicemen. Treasury Department will be unable issue new bills or bonds, and instead rely on emergency funds and tax revenue to pay for the bill.
In the worst case scenario, the U.S. could be so strapped for cash that it has to postpone the payment of principal or interest on its debt.
The Treasury Department initiated a series “extraordinary” actions to prevent a default when the government reached that limit in early January.
A technical default could also result in severe consequences for millions. John Lynch, chief Investment Officer for Comerica Wealth Management, said that Social Security recipients, Veterans, U.S. Military Employees, Government Employees, Defense Contractors, and others, would be likely to go without payment. The downstream effects of job loss and the freezing of credit markets would have a negative impact on GDP for multiple quarters, making an even deeper recession almost certain.
The dire warnings are coming amid a long-running standoff over debt limits. Republicans who control the House have pledged to raise borrowing limits only in exchange of deep cuts in spending. The Senate Democrats and President Biden, who are in control, refused to negotiate, insisting on a debt ceiling bill without any cuts.
Biden met with House Speaker Kevin McCarthy (R-Calif.) and other congressional leaders Tuesday at the White House to discuss the nation’s debt and spending, but there was no consensus.
Biden stated that “default is not an alternative” after the meeting. “I said that repeatedly. America is not a nation of deadbeats. “We pay our bills and the United States Congress has a fundamental duty to avoid default.”
McCarthy also said that the two sides had reached an impasse.
He said, “I did not see any new movements.”
The meeting scheduled for Friday between Biden and McCarthy, along with the other leaders of Congress, has been postponed to early next week.
The U.S. would have to default temporarily on some of its debts if it failed to increase or suspend the limit. This could have severe negative economic consequences. Interest rates will likely rise, and the demand for Treasurys will drop. Even the threat of default could increase borrowing costs, according to Committee for a Responsible Federal Budget.
The U.S. never defaulted before on its debt, but it was close in 2011 when House Republicans refused a debt ceiling increase. This led Standard and Poor’s rating agency to lower the U.S.’s debt rating by one notch.
