The United States reached the debt ceiling on Thursday and the Treasury Department immediately took special measures to avoid a payment default that could be devastating.
Reaching the debt limit means the government can’t borrow any more money unless Congress agrees suspend or change the cap, which currently stands at almost $31.4 trillion.
Typically that is what happens.
Since 1960, politicians have moved to increase, extend, or revise the definition of the debt limit 78 times, including three in the last six months alone.
But renewed tensions in Congress, where Republicans have just seized control of the House of Representatives and are calling for spending cuts, have raised concerns that politicians will be slow to react this time, which could lead to the US. USA to a default intentional for the first time in its history.
What will the United States do now?
For the majority of the population, the impact should be barely noticeable, at least in the first few months.
The US Treasury Department can handle the situation by taking steps to prevent the limit from actually being exceeded.
In the past, this has included steps like suspending investments you’re supposed to make in retirement and health benefit funds for federal employees, and then re-covering those funds at a later date.
In a January 19 letter, Treasury Secretary Janet Yelen announced something similar: a “debt issuance suspension period” for the Civil Service Retirement and Disability Fund (Csrdf) until June 5, as well as a suspension of payments to the Postal Service Retiree Health Benefit Fund (Psrhbf).
“By law, the Csrdf and the Psrhbf will be recomposed once the debt ceiling is increased or suspended,” the letter added. “Retirees and federal employees will not be affected by these actions.”
But even delays have a real price.
A standoff over the issue in 2011 led credit ratings agency S&P to downgrade the country, a first for the US.
Government analysts have estimated that delays that year caused the cost of borrowing for the US Treasury to rise by at least $1.3 billion as investors demanded higher rates due to uncertainty.
Analysts already expect that the debate on the subject this year will make financial markets nervous.
Then, economic catastrophe?
Yellen estimates that the special measures can buy the country time until at least June, by which time the government will no longer be able to pay its bills.
That is the scenario that many analysts see as a true economic catastrophe.
If it were to be reached, some say the authorities would have to do everything possible to avoid defaults.
This translates into finding ways to make interest payments while other obligations remain outstanding, such as payments to defense contractors; social security checks, which are received by millions of retirees across the country; and the salaries of government employees, including the military.
Even something as basic as weather forecasts could be affected, as many rely on data collected by the government-funded National Weather Service.
A default could ruin the country’s reliability, hurting global financial markets, where US debt is highly traded as it is traditionally considered low risk.
The dollar as a currency would weaken and borrowing costs would rise, initially for the government, but ultimately also for the general public, reflected in higher interest rates for mortgages, credit card debt, and other loans.
Getting to that point would be unprecedented and would cause widespread damage to consumer confidence and the economy, which is already in a precarious state.
“Failure to meet government obligations would cause irreparable damage to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen recently warned.
Why has it become a growing problem?
The debt limit was first introduced in 1917, as a way of giving you flexibility to the government to raise money during the First World War.
In theory, it gives Congress a way to rein in spending.
But the fights over the ceiling have become increasingly adversarial, as both political polarization and US debt (which nearly doubled in a decade) have increased.
That’s partly due to significant government spending during the financial crisis. [de 2008] and during the pandemic, but it also results from the fact that the country has been running a constant budget deficit, spending more than it takes in, since 2001.
Now, the debt ceiling is a perennial political bargaining chip.
The 2011 fight over this issue was resolved when then-President Barack Obama agreed to cut more than $900 billion worth of spending, which led to the debt limit being lowered by a similar amount.
Some Republicans are pushing spending cuts again this time, a position Democrats have rejected.
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