Will the US default on its obligations after reaching its debt ceiling on Thursday?
Today, the U.S. government is already approaching the legal limit of $31.4 trillion in borrowing, at which point accounting maneuvers will be used to avoid temporary defaults.
A debt ceiling is a limit imposed by Congress on the amount of public debt that a government can borrow over a certain period of time, and when the government reaches the maximum allowable debt ceiling, then it will not be able to issue any securities or money. Currently, spending in the US exceeds GDP, so the country borrows to make up for the shortfall, and loans are done through the Treasury Department, via bond issuances.
If the US is ultimately unable to pay its bills, it will default on its debt. This happened only once in US history, back in 1979. Economists say another default could mean a recession and a potential financial crisis not only in the US but globally.
Mark Zandi, chief economist at Moody’s, said: “The repercussions are serious… It would create chaos in the financial markets and completely undermine the economy. The economy will enter a severe recession.”
US Treasury Secretary Janet Yellen said the US was likely to reach its $31.4 trillion debt ceiling on Thursday, today. In a letter to Congress, she said the Treasury Department would have to implement “extraordinary measures” to manage liquidity that could prevent debt defaults until early June.
Read: 61% probability of US recession in next 12 months: Report
Republicans oppose raising the US debt ceiling, which threatens to disrupt the world’s largest economy, and could push the country into default.
Republicans, who now wield influence in the House of Representatives enabling control of the party’s slim majority, are demanding that President Joe Biden agree to cut government spending, arguing that it is time to drastically reduce the borrowing that Congress approves to increase each year.
The White House requires that any spending cuts demanded by Republicans not affect Social Security programs and military spending and that it avoids new taxes.
On Wednesday, the White House announced that Biden would not negotiate with hardline Republicans over their opponent’s position. White House spokeswoman Karine Jean-Pierre told reporters: “There will be no negotiations on the debt ceiling. We won’t. This is their constitutional duty,” she said, adding: “This should not be used as a political football game.”
The dispute over raising the debt ceiling between Democrats and Republicans in the House and Senate has surfaced in recent days after Congressional Spokesman Kevin McCarthy called on Democrats to put an end to government spending in the new budget to avoid the need for the US to borrow again and break the debt ceiling.
Reaching the national debt ceiling is a major concern for Washington at the moment, and a default on US government debt will have very serious consequences for the US financial system and economy, affecting the lives of Americans, especially on the side of Social Security, healthcare, and federal government services.
A report by Moody’s ratings showed catastrophic, devastating, and unimaginable effects if the US defaulted on its debt, and the effects equal to those of the post-2007 financial crisis, such as a roughly 4 percent drop in GDP, a loss of nearly six million jobs, and a drop in stock prices by almost a third.
The decision to raise the US debt ceiling is not the first of its kind in the US, and it has been done more than 80 times in the country’s history to avoid the worst-case scenario, the last time being in December 2021, when the ceiling was raised by $2.5 trillion to a total of $31.4 trillion, which is equivalent to more than 120 percent of US GDP.
The situation in 2011 was frightening, as the long battle between Democrats and Republicans over the debt ceiling bill led to a brief downgrade of the US credit rating and prompted the government to cut its federal and military spending for years.
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