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What Happens When the U.S. Hits Its Debt Ceiling? Forex education for beginners GB


  • As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling.

  • When the Treasury Department spends the maximum amount authorized under the ceiling, Congress must vote to suspend or raise the limit on borrowing.

  • Economists warn of dire consequences, including default, if Congress cannot reach an agreement on the ceiling.

What Happens When the U.S. Hits Its Debt Ceiling?
The United States debt ceiling is the legal limit on the amount of national debt that the US government can accumulate. When the government hits the debt ceiling, it can no longer issue new bonds or borrow money to fund its operations. This means that the government may be forced to default on its obligations, which could have serious consequences for the economy and financial markets.
If the government hits the debt ceiling, it would have to prioritize its spending to ensure that it can meet its most critical obligations, such as paying interest on existing debt, Social Security payments, and military salaries. This could mean that other government programs and services would have to be cut or temporarily suspended until the debt ceiling is raised.
A default on US debt would have serious consequences for the global financial system, as US Treasury bonds are widely held as a safe haven asset. A default could lead to a significant increase in interest rates, which would make it more expensive for the US government to borrow money in the future. It could also cause a drop in the value of the US dollar, which could have ripple effects throughout the global economy.
In the past, Congress has raised the debt ceiling when necessary to avoid a default. However, there have been instances where political gridlock has made it difficult to raise the debt ceiling in a timely manner, leading to uncertainty and market volatility. Ultimately, hitting the debt ceiling is a situation that should be avoided, as the consequences could be severe.

Current overview:

Congress has authorised trillions of dollars in spending over the last decade, causing the United States’ debt to nearly triple since 2009. Over that period, the Treasury Department’s ability to borrow money to make payments on that debt has repeatedly run into a congressionally mandated limit on borrowing known as the debt ceiling.

Efforts to raise or abolish the ceiling have become a topic of heated debate among policymakers; some lawmakers who decry government debt have used negotiations on altering the limit to try to force spending cuts. The congressional brinkmanship over the issue has increasingly led to disruption, including government shutdowns, and the spectre of default that has threatened to push the economy into crisis. With the issue again on the table in 2023 under President Joe Biden and a Republican-controlled House of Representatives, economists are warning of catastrophic consequences if the Treasury Department can no longer pay the nation’s debts.

What is the debt ceiling?

Created by Congress in 1917, the debt limit, or ceiling, sets the maximum amount of outstanding federal debt the U.S. government can incur. In January 2023, the total national debt and the debt ceiling both stood at $31.4 trillion. The U.S. government has run a deficit averaging nearly $1 trillion every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. To make up the difference, it has to borrow to continue to finance payments that Congress has already authorized.

Congressional action to raise the debt ceiling does not increase the nation’s financial commitments, as decisions to spend money are legislated separately. Any change to the debt ceiling requires majority approval by both chambers of Congress.

How often has it been raised?

Raising or suspending the debt ceiling becomes necessary when the government needs to borrow money to pay its debts. For much of the past century, raising the ceiling has been a relatively routine procedure for Congress. Whenever the Treasury Department could no longer pay the government’s bills, Congress has acted quickly [PDF] and sometimes unanimously to increase the limit on what it could borrow. Since 1960, Congress has increased the ceiling seventy-eight times, most recently in 2021. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine were under Democratic presidents.

What would be the consequences if the United States breaches the debt ceiling?

The debate over the debt ceiling has caused economists such as CFR’s Roger Ferguson to consider the once unthinkable prospect of a U.S. default—that is, Washington declaring that it can no longer pay its debts. Some experts say that would herald chaos for the U.S. and global economies. Even short of default, hitting the debt ceiling would hamstring the government’s ability to finance its operations, including providing for the national defence or funding entitlements such as Medicare or Social Security.

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a drop-off in consumer confidence that could shock the U.S. financial market and tip the economy into recession. Goldman Sachs economists have estimated that a breach of the debt ceiling would immediately halt about one-tenth of U.S. economic activity. According to centre-left think tank Third Way, a breach that leads to default could cause the loss of three million jobs, add $130,000 to the cost of an average thirty-year mortgage, and raise interest rates enough to increase the national debt by $850 billion. In addition, higher interest rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Treasury Secretary and former Federal Reserve Chair Janet Yellen wrote to Congress in January 2023.

Could breaching the U.S. debt ceiling bring down other markets?

Experts say a U.S. default could wreak havoc on global financial markets. The creditworthiness of U.S. treasury securities has long bolstered demand for U.S. dollars, contributing to their value and status as the world’s reserve currency. Any hit to confidence in the U.S. economy, whether from default or the uncertainty surrounding it, could cause investors to sell U.S. treasury bonds and thus weaken the dollar.

Over half of the world’s foreign currency reserves are held in U.S. dollars, so a sudden decrease in the currency’s value could ripple through the market for treasuries as the value of these reserves drops. As heavily indebted low-income countries struggle to make interest payments on their sovereign debts, a weaker dollar could make debts denominated in other currencies relatively more expensive and threaten to tip some emerging economies into debt crises.

Many U.S. exporters could benefit from dollar depreciation because it would increase foreign demand for their goods by effectively making them cheaper. Yet, the same firms would also bear higher borrowing costs from rising interest rates. Dollar instability could also benefit aspiring great-power rivals such as China. Though Beijing has long sought to position its renminbi as a global reserve, the currency accounts for under 3 percent of the world’s allocated foreign reserves.

Concluding and as stated, If the U.S. hits its debt ceiling, several things could happen. First, the government may be forced to delay or suspend payments on its outstanding debt, which could trigger a default on its obligations. This could have serious consequences for the U.S. economy and financial markets, as well as for investors who hold U.S. Treasury bonds.

Second, the government may be forced to prioritise its spending, choosing which obligations to meet and which to delay or suspend. This could lead to cuts in government programs and services, as well as furloughs or layoffs of government employees.

Third, hitting the debt ceiling could also lead to a loss of confidence in the U.S. government's ability to manage its finances, which could damage the country's credit rating and make it more expensive for the government to borrow in the future.

To avoid these outcomes, Congress and the President must work together to either increase the debt ceiling or find other ways to reduce the government's spending or increase its revenue. In the past, Congress has raised the debt ceiling several times to avoid a default, but the process can be contentious and politically fraught.

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