Around June, the federal government’s debt will surpass the $31.4 trillion “debt ceiling,” which refers to the cap on how the Treasury Department can legally borrow.
So, what does that mean?
If Congress fails to raise the ceiling the U.S. will default on its debt for the first time in history, meaning the Treasury Department will no longer be able to issue new debt to pay for the government’s expenses.
How did we get here?
Under a 1917 law, Congress has to vote to raise the debt limit, something it has accomplished dozens of times, usually without controversy.
This time, however, a small group of far-right members of the House of Representatives are refusing to raise the ceiling unless Congress also makes dramatic cuts to federal spending.
On the other side, the White House is refusing to negotiate at all on spending cuts, calling on Congress to cleanly increase the debt limit with no strings attached.
Neither side has blinked so far, and it’s a game of political chicken that will have a serious impact on your life.
Turmoil for loans
To fund the federal debt, the Treasury Department issues bonds backed by the “full faith and credit” of the United States. Because the U.S. has long been a pillar of the global economy, our credit rating has been one of the best in the world and there has been virtually no default risk attached to a Treasury bond.
But history shows even brushing up against the debt ceiling can have bad consequences. During the 2011 debt ceiling crisis, after a contentious political debate, the federal government avoided defaulting on its debt by just a few hours. Yet that was enough for the ratings agency, S&P to downgrade the United States’ credit rating from AAA to AA+.
According to CNBC, “Any ding in the U.S. credit rating would likely raise rates on other types of debt, such as mortgages and auto loans, to account for additional risk.”
Chaos for the markets and the economy
If you have any money invested in the markets and the debt ceiling crisis drags on, you’d better buckle up.
During the 2011 debt ceiling crisis, even getting close to the chance of a default was enough to cause one of the worst periods for stock markets since the 2008 financial crisis.
You would also likely be hit by the global recession a default could cause. In an interview with Bankrate, Scott Clemons, chief investment strategist and partner at Brown Brothers Harriman, described the U.S. Treasury market, which would be directly impacted by a default as “the circulatory system of the global economy.”
Citing a September 2021 Moody’s study, the Committee for a Responsible Federal Budget writes that, “a default could have similar macroeconomic consequences to the Great Recession: a 4 percent Gross Domestic Product (GDP) decline, nearly 6 million lost jobs, and an unemployment rate of 9 percent.” They also predict that American households could lose $15 trillion in household wealth as markets drop.
Benefits and paychecks paused
Should the federal government hit the debt ceiling a few months from now, Forbes reports that the Treasury would likely be forced to withhold government benefits and use that money to try and stave off a default.
An immediate effect would be that the more than 70 million Americans receiving Social Security benefits would likely see their benefits paused for the foreseeable future.
After the debt limit is raised those payments would be paid out, but then tens of millions of senior Americans would take a substantial hit to their incomes.
The same goes for millions of government workers, who would likely see their payments paused without a debt ceiling increase.
