It’s crunch time. President Joe Biden and the Republicans in the House of Representatives have only a few days left to act to prevent the country from defaulting. In January, the US hit its $31.4 trillion debt ceiling, meaning the federal government can’t afford any more bills (or borrow more money) — so paying the bills on time has only gotten more complicated.
How will the debt ceiling deadline affect you? It’s a challenging question, so let’s pull back the levels. Here’s what you should know.
What is the debt ceiling?
Created by Congress in 1917, the debt ceiling limits how much the U.S. can borrow to fund legal obligations that lawmakers have set in the past (Social Security, tax refunds, military salaries, interest payments on outstanding debt, medical benefits, and more). In other words, it limits the amount of debt the US can take on. The current debt ceiling is $31.4 trillion.
What does reaching the debt ceiling mean?
Reaching the debt ceiling would not be a hot topic if the country’s revenues exceeded its costs (the government gets money primarily from personal and corporate taxes, but it also has other sources such as leases on government-owned buildings and land and sales of natural resources). and entry into national parks).
However, the US was not in the green since 2001That means the government has had to borrow money to fund operations for over 20 years. Now that the US has reached its debt limit, there are two options: raise the limit, suspend it 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 absorb). The suspension of the debt ceiling means the Treasury Department can temporarily override the ceiling and borrow more beyond the current limit. Should the US default, the country would be unable to pay its bills on time and the economic impact would likely be felt immediately.
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When is the deadline for raising or suspending the debt ceiling?
In a letter to House Speaker Kevin McCarthy on Monday, Treasury Secretary Janet Yellen warned that unless Congress raises or suspends the debt ceiling on June 1, it is “highly likely” that the Treasury Department will be unable to meet its financial obligations .
“I continue to urge Congress to protect the full confidence and credit of the United States by acting as expeditiously as possible,” she wrote.
What would happen if the US defaulted?
In March, Mark Zandi, chief economist at Moody Analytics, said warned that a US default would be “catastrophic” and Americans would likely pay for the default “for generations.”
For example, government employees and government-contracted companies may not be paid on time, and Social Security payments may be halted. More broadly, it would also trigger “a loss of confidence among consumers and businesses,” it said Brookings Institution analysts Wendy Edelberg and Louise Sheiner.
Would a default trigger a recession?
The default would essentially trigger a nationwide economic meltdown, triggering an “immediate, sharp recession,” according to the Council of Economic Advisors warned Early May.
Harry Mamaysky, professor of professional practice at Columbia Business School, narrated entrepreneur The The government has “many obligations to many people”.
“At some point, when the money runs out, they have to start prioritizing who pays first,” Mamaysky said. “Someone isn’t going to get the money they’re owed on time, and that’s going to be disruptive.”
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However, the short-term effects of a default might not be nearly as damaging as the long-term effects – Mamaysky calls this a “reputational issue” that could challenge the US’s credibility as a smart country to do business with.
“That’s the biggest risk for me — it’s not what happens this year or next, but in five to 10 years, will the world perceive the US as the best country in the world to do business with?” he said. “It’s not imminent, but if Congress doesn’t pay attention, trust will be eroded.”
On Wednesday, top credit rating agency Finch put the US’s current “AAA” rating to “Rating Watch Negative,” meaning the country’s perfect rating could be downgraded.
“The Rating Watch Negative reflects increasing political partisanship that, despite the fast approaching x-date (when the US Treasury will exhaust its cash holdings and capacity for extraordinary measures without incurring new debt), a solution to raising or suspending the Debt limit prevented.” the company said in a statement.
How Does Default Affect Small Businesses?
A recently report The Goldman Sachs study found that 65% of small business owners would face “adverse effects” if the US defaulted on its debt. In addition, 90% said it was “very important” for the government to avoid defaulting.
If the U.S. defaults, government-contracted companies may not get paid, and stores whose customers rely on food stamps or Social Security to pay for essentials could see spending fall.
“If you’re a Social Security recipient and you owe rent, you may not have the money to pay the rent,” Mamaysky added. “And if the landlord owes the utility bill for their building, they may not be able to pay the utility bill because they haven’t received the rent.”
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In addition a 2011 Federal Reserve of New York According to the report, small businesses were hardest hit during the 2008-2009 recession.
According to the report, banks become “more selective and risk-averse” in lending in a recession, making it harder for individuals to obtain small business credit.
“Small companies, which rely more on external financing and tend to be more risky, are more likely to be hit by a credit crunch,” the researchers write.
How often has the debt ceiling been raised or changed?
Despite current pressures to raise or suspend the debt ceiling, this is a relatively routine practice for the US government. Since 1960, Congress has 78 times taken action to raise, temporarily extend, or revise the definition of the debt limit to prevent a default — 49 times under Republican presidents and 29 times under Democratic presidents, the Treasury Department said both parties have recognized the need to do is.”
Most recent rise was in 2021 when the debt ceiling was raised by $2.5 trillion.
How long does it take to raise or suspend the debt ceiling?
McCarthy and the Biden administration are negotiating a deal to avoid a federal default. However, the two take different stances: McCarthy and House Republicans are pushing for $3.6 trillion in cuts and caps on future spending on certain programs (not listed in the bill) in exchange for a debt ceiling hike, while the Biden administration is focused on raising the limit and paying bills on time before agreeing to any cuts.
On Thursday, the House of Representatives is scheduled to vote on an agreement and then pause while negotiators continue to work on an agreement.
“Following [Thursday’s] “If a new agreement is reached between President Biden and Speaker McCarthy, members will be given 24-hour notice in case we need to return to Washington for more votes over the weekend or next week,” House Majority Leader Steve Scalise said, per CNN.
What is the 14th Amendment and what does it have to do with the debt ceiling?
The 14th Amendment covers the same protections and other rights such as citizenship, state taxation, and anything Congress can regulate. The fourth section The constitutional amendment relating to the national debt states that the “validity of the national debt of the United States . . . shall not be questioned.”
Given that the US has hit its debt ceiling and may not be able to pay its bills, there is Fight that by invoking the 14th Amendment, Biden has the legal authority to bypass Congress (which authorizes any action to raise or suspend the debt ceiling) and essentially continue to issue more debt through the Treasury Department and ignore the debt ceiling.
Biden has been supportive but cautious about invoking the 14th Amendment as a solution.
“The question is whether it would be possible to do so in such a timely manner and claim that there is no appeal and as a result the date in question has passed and the debt still cannot be paid? That’s an issue that I believe is unresolved,” Biden told reporters Sunday, per The Wall Street Journal.
Some experts believe the move is unconstitutional.
“Even if the Biden administration is flirting with these ideas, it actually suggests that the administration’s allegiance to the constitution is questionable or opportunistic,” said Philip Wallach, senior fellow at the center-right think tank American Enterprise Institute Wall Street Journal.
Others expressed their opinions on the idea a little more clearly. Yellen said she could “constitutional crisis“And Rep. Chip Roy said if Biden went down the 14th Amendment route, Republicans in the House would “blow up nonsense.”