What is at stake in the debt ceiling, stopping the national debt

You’ve probably heard about the huge national debt problem over the years. If you’re Gen Z, this has been an issue for your entire conscious life. Since 2000, the debt increased from $5.6 trillion to more than $31.38 trillion—a whopping 460% increase—while threatening to let the country default became a hot-button issue. (The oldest members of Gen Z were born in 1997, so they’ve been living with financial doomsday warnings about debt since age 3.) Threats to Congress to refuse to raise the debt ceiling are mounting. also in previous years. 20 years, mostly as Republicans, the party traditionally associated with debt reduction (despite Republican Presidents George W. Bush and Donald Trump both deficits are growing), hammer home the need to cut spending while a Democrat is in office.

However, despite some close calls, the US has never breached its debt obligations. But the tug-of-war is now playing out again, as Republican Speaker of the House Kevin McCarthy refuses to pass what Democratic President Joe Biden calls a “clean” debt ceiling bill (ie, without spending cuts included).

The debt ceiling is the legal limit on the total amount of debt that the federal government can borrow to finance its spending. This is not an ancient part of American history: It was enacted in another economic period, in 1917while Congress paradoxically sought to streamline the fundraising process with the entry into World War I. 79th time since 1960, according to the Treasury Department. As many times before, the Treasury used what it called “extraordinary steps” to continue paying America’s bills. But now, the so-called “X-date,” where the government will not be able to fulfill all its obligations despite these financial maneuvers is fast approaching, with Treasury Secretary Janet Yellen. estimate that the country will hit it that was June 1.

Presidents in both Democratic and Republican administrations have the ceiling has been raised more than 100 times since World War IIaccording to Congressional Research Service. Although there have been many public partisan battles over this – perhaps most notably in 2011 and 2013 – the parties have always reached some kind of agreement.

Yellen rejected the “detrimental” effects in a default of not only the markets, the reputation of the dollar, and the credit rating of the US, but also the personal finances of large swaths of the country. Experts like Mark Zandi, chief economist at Moody’s Analytics, agree, as he testifies to Congress recently: “The Treasury debt limit is an immediate threat to any optimism that the economy can avoid recession in the coming year and poses a long-term threat to the nation’s finances and economic growth. “

So how would a failure to raise the debt ceiling—and a default on the national debt—hurt you? Here are three possible “disastrous” financial disasters that can happen.

1 – Delayed Social Security payments

No one knows how the government will react to an unprecedented default on its debt, but very quickly, the US government could transfer funds to its debt obligationswithout costing tens of millions of Social Security beneficiaries in the process.

“Social Security beneficiaries who see delays in their payments may face problems with expenses such as rent and utilities,” writing Wendy Edelberg of the Hamilton Project Louise Sheiner of the Hutchins Center on Fiscal and Monetary Policy. “[F]Federal contractors and employees will face uncertainty over how long their payments will be delayed. “

Eventually, the government will pay for the delayed benefits. But that can be done effects of the disaster for many seniors and other recipients who rely on their monthly payments to get by.

2 – Higher interest rates

The economy has been hammered by higher interest rates for several months as the Federal Reserve ramps up its campaign to lower inflation. Many financial experts—including Zandi—say a recession is likely this year. Failure to raise the debt ceiling would create a recession almost immediately. “The timing couldn’t be worse for the economy,” he said.

So interest rates on mortgages, car loans, and credit cards have already gone up, but a default would send them even higher—not to mention the cost of business borrowing.

And even if the debt is resolved after a default, “rates won’t go back to where they were,” Zandi said, because Treasury securities are no longer considered risk-free by global investors. He predicted that “future generations of Americans will pay a high economic price.”

Even the threat of a debt ceiling breach can raise rates: The 2011 debt ceiling waiver led to an increase in borrowing costs of more than $1 billion, according to the Government Accountability Office. and the reports say the current uncertainty is causing mortgage rates to rise today.

“If policymakers actually fail to increase or suspend the limit before the Treasury runs out of money and defaults on its obligations, interest rates will rise and stock prices will soar, at great cost to taxpayers. and economy,” said Zandi.

3 – Job loss and market turmoil

White House economists recently estimated that as many as 8 million people could lose their jobs during a prolonged default. It would also almost certainly lead to a recession, affecting all Americans in some way, because “a real default would devastate the world’s financial markets and create chaos,” according to the Committee for a Responsible Federal Budget. “Both domestic and international markets depend on the relative economic and political stability of US debt instruments and the US economy.”

Defaulting could put the country in a situation similar to the global financial crisis, according to a report from Moody’s. That could result in a loss of $12 trillion in household wealth, with stocks potentially falling by as much as a third.

“Times couldn’t be worse for the economy; even before the specter of a debt limit breach, many CEOs and economists believe a recession is likely this year,” the report reads.

That being said, the stock market has remained strong so far, even as the country approaches the X-date.

“On June 15th, quarterly federal income taxes are due. That will provide a large flow of revenue to the Treasury Department,” said Keith Singer, a certified financial planner (CFP) in Florida. “The question is can we do it by June 15?”

However, financial advisors say not to panic. Most have faith that Democrats and Republicans will be able to come to an agreement to prevent the financial markets from falling into complete chaos.

“Should you be overly concerned over the next two weeks with the impending X-date and pivot a good portion of your nest egg into cash, gold bars and crypto? The short answer is no,” says Jon Ulin, a CFP in Florida. “Simply put, the US cannot afford to have its reputation tarnished.”

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