U.S. debt ceiling. What will happen?

Introduction

Congress has authorized trillions of dollars in spending over the past decade, as a result, the debt of the United States almost tripled from 2009 of the year. During this period, the ability of the Ministry of Finance to borrow money to pay off this debt has repeatedly rested on the limit, established by Congress. on borrowings, known as the debt ceiling.

Efforts to raise or remove the ceiling have been the subject of heated debate among policymakers; Some legislators, denouncing the national debt, used negotiations to change the limit, to try to achieve cost reductions. Congressional balancing on this issue is increasingly faltering, including the closure of the government, and the specter of default, that threatens to push the economy into crisis. Economists warn, that this issue will again be discussed in 2023 under President Joe Biden and the House of Representatives, Republican-controlled, On catastrophic consequences, If the Ministry of Finance can no longer pay the country's debts.

The current situation on the US debt ceiling

  1. President Joe Biden and Republican House Speaker Kevin McCarthy reached agreement in principle to raise the US national debt ceiling by two years.
  2. The agreement is a compromise, which aims to reduce costs, Protecting critical programs for working people and boosting economic growth.
  3. There are no new taxes in the bill, But there are significant spending cuts and reforms, aimed at alleviating poverty1​.
  4. The deal still requires congressional approval, where both sides must find a compromise, which could take place both in the House of Representatives, and in the Senate.
  5. The deal is designed to prevent an economically destabilizing default, that would happen, if the debt ceiling had not been raised to 5 June.
  6. Long-term steel production had a negative impact on financial markets, influencing stocks and forcing the U.S. to pay record interest rates on bond sales1​.

What is the U.S. debt ceiling?

Created by Congress in 1917 A debt limit or ceiling sets a maximum amount of outstanding federal debt, which the U.S. government can take over. In January 2023 The total public debt and the debt ceiling were 31,4 trillion dollars. U.S. government deficit with 2001 years is on average almost 1 trillion dollars a year, which means, that it spends a lot more money, what it receives in the form of taxes and other income. To make up the difference, He has to take out loans, To continue to fund payments, which Congress has already authorized.

Congressional action to raise the debt ceiling does not increase the country's financial obligations, As spending decisions are regulated separately. Any change in the debt ceiling requires the approval of a majority of both houses of Congress.

How often was it raised??

Raising or suspending the debt ceiling becomes necessary, When the government needs to borrow money, to pay off your debts. For most of the last century, raising the ceiling was a relatively routine procedure for Congress. Every time, When the Ministry of Finance could no longer pay the government's bills, Congress acted quickly , and sometimes unanimously, Increasing the maintenance limit, what he could borrow. With 1960 Congress raised the ceiling seventy-eight times, Last time in 2021 year. Forty-nine of these increases were made under Republican presidents, and twenty-nine – Under Democratic presidents.

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Congress can also suspend the debt ceiling or temporarily authorize the Treasury to lift the debt limit, and not increase it by a certain amount. Although this step was rare during the first ninety years of the ceiling's existence, Congress has suspended the debt limit seven times since 2013 of the year.

A new chapter in the debt ceiling debate began in 2011 year, as spending disputes between President Barack Obama and congressional Republicans led to a protracted impasse. In the end, Congress reached an agreement to raise the ceiling just two days before the date, when, according to the estimates of the Ministry of Finance, He will run out of money. However, brinkmanship triggered the most volatile week for U.S. stocks since the financial crisis 2008 of the year, and Rating Agency S&P Global downgraded the creditworthiness of the United States for the first and only time in history. Government Accounts Chamber, who performs the functions of a federal auditor, Counted, that the delay in the deal increased the cost of borrowing in the U.S. by 1,3 billion dollars.[PDF] Only this year. In May 2023 Fitch rating agency placed U.S. debt on the list of negative, which usually precedes a downgrade.

With U.S. political polarization deepening over the past decade, votes for raising the debt ceiling remain controversial, and budget hawks in Congress are increasingly demanding spending cuts in exchange for their support. When in 2013 year the debt ceiling has expired, The debate over the limit forced the government to suspend work, and in 2021 year the question again became decisive . While politicians are again discussing the debt ceiling in 2023 year, President Biden and senior Republicans in the House of Representatives are negotiating increases in exchange for cuts in federal spending.

"If you gave your child a credit card, And it would continue to reach the limit, You wouldn't keep just increasing it. You'd sit down with them, to determine, where they overspend and where they can change their behavior.", House Majority Leader Kevin McCarthy wrote on Twitter. "It's time for the federal government to do the same.".

As of May 2023 Negotiations have focused on Republican proposals to impose job requirements on some recipients of federal benefits, Impose permanent limits on federal spending and loosen permitting rules for fossil fuel energy projects.

U.S. debt ceiling

What will be the consequences, if the United States exceeds the debt ceiling?

The debate over the debt ceiling has forced such economists, like CFR's Roger Ferguson, think about the once-unthinkable prospect of a US default, that is, Washington's statements about, that he can no longer pay his debts. Some experts say, that it portends chaos for the U.S. and the global economy. Even if there is no default, Reaching the debt ceiling would undermine the government's ability to finance its operations, including providing for or funding national defence;, like Medicare or Social Security.

Potential consequences of hitting the ceiling include credit rating downgrades by credit rating agencies, Increasing borrowing costs for businesses and homeowners, as well as a drop in consumer confidence, that could shock the financial market of the United States and lead its economy – and the world – into an immediate recession. .

"I think, it's safe to say, What if we default, then the chances of a recession will be almost certain.", Former Treasury Secretary Jacob Lew said at a CFR event in April 2023 of the year.

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Goldman Sachs economists have calculated, that a debt ceiling breach would immediately halt about one-tenth of U.S. economic activity. According to the center-left think tank Third Way, infringement, leading to default, could lead to the loss of three million jobs , add 130 000 dollars to the cost of an average thirty-year mortgage and raise interest rates so much, to increase public debt by 850 Dollars . billion. Besides, Higher interest rates could divert future taxpayers' money from much-needed federal investments in such areas, As an infrastructure, Education and health.

"Failure to fulfill the government's obligations will cause irreparable damage to the US 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 of the year [PDF ] .

Could a U.S. debt ceiling breach bring down other markets??

Experts say, that a U.S. default could hurt global financial markets. The creditworthiness of U.S. Treasury securities has long supported demand for U.S. dollars, contributing to their value and the status of the world's reserve currency . Any blow to the credibility of the U.S. economy, whether it is a default or the uncertainty surrounding it, could force investors to sell U.S. Treasuries and potentially weaken the dollar.

More than half of the world's foreign exchange reserves are held in U.S. dollars , Therefore, a sudden decline in the value of the currency may be reflected in the treasury market as the value of these reserves falls. While low-income, heavily indebted countries struggle to pay interest on their sovereign debts, A weaker dollar can make debt, denominated in other currencies, relatively more expensive and threaten to plunge some developing countries into debt or political crisis.

Many U.S. exporters could benefit from the depreciation of the dollar, as it would increase foreign demand for their goods, in fact, reducing the cost of them. Nevertheless, The same firms will also incur higher borrowing costs due to higher interest rates. The volatility of the dollar could also benefit such great powers, like China. Although Beijing has long sought to position its yuan as a global reserve, This currency accounts for: 3 percent of the world's foreign exchange reserves distributed.

"For Congress, who is obsessed with America's reputation vis-à-vis China, thought about, that he will go to an end in itself and provide China with such an opportunity, seems incomprehensible.", writes Marcus Noland, Executive Vice President and Director of Research at the Peterson Institute for International Economics, An unbiased think tank.

U.S. debt ceiling

Does the government have options?, if the ceiling is not raised?

If the Congressional negotiations on the debt ceiling are not completed before, How the ceiling will be reached, The Treasury can prevent a default for several months with a series of temporary actions, which it calls "emergency measures.". These include the suspension of payments on some savings programs of civil servants, insufficient investment in certain public funds and postponement of securities auctions.

While the Ministry of Finance used these measures, When previous negotiations reached an impasse, including in 2011 And 2013 years, Congress has always raised the ceiling before, How the measures were exhausted. If Congress Doesn't Take Action to Raise the Debt Limit, Despite such extraordinary measures, Federal spending will have to fall sharply, or taxes should increase significantly (or a combination of the two). IN 2023 The debt ceiling was reached without a deal 19 January; Treasury Secretary Yellen warned, that emergency measures can be exhausted by 1 June. Experts see it as a reduction in federal spending, and an increase in tax revenues, sufficient to cover the necessary payments, As processes, which can take more than ten years .

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As this date was approaching, And there was no deal to increase or suspend the limit, Some experts suggested alternatives, that do not require congressional approval. These include an appeal to the Fourteenth Amendment to the U.S. Constitution, which states:, that "the validity of the national debt of the United States ... should not be questioned.", to issue additional debt obligations; others include the sale of U.S. gold and the minting of a platinum coin worth 1 trillion dollars. Biden has publicly called these measures untenable. The Treasury Department can also defer the payment of salaries to the military or Social Security and Medicare recipients. He has the ability to prioritize debt repayment, Although in March 2023 Yellen rejected the idea, calling it a "default under a different name".

Despite the cushion of emergency measures, A prolonged impasse with a debt ceiling may be enough, to undermine investor confidence. In May 2023 Interest rates on four-week U.S. Treasury bills, which have long been considered the safest asset in the financial system, reached an all-time high.

Are there similar policies in other countries??

Few countries maintain a debt ceiling, And nowhere else do limits regularly threaten serious economic shocks. In Denmark it is, But it is so much higher than the country's expenses, which is not a problem. IN 2021 year the debt of the central government of Denmark was about 14 Percent [PDF] from its ceiling. Australia has introduced a debt limit in 2007 year in order to legislate fiscal responsibility in the face of a large budget deficit. The ceiling was raised several times, before it was canceled in 2013 year. Poland's constitution caps spending at 60 percent of gross domestic product (GDP), but does not limit borrowing.

Should the debt ceiling be lifted??

Some analysts argue, what, requiring the consent of the legislature, the debt limit gives Congress certain oversight powers and generates financial reporting. The Original Law 1917 year was to give the Treasury some autonomy in respect of borrowing, allowing it to issue debt to the ceiling without congressional approval of each issue; to 1917 Congress authorized the Treasury to borrow in smaller installments. But in recent years, opposition parties have often used debt cap negotiations as leverage over politics, not related to the ceiling itself.

Some economists say, that the debt ceiling still serves a useful purpose, creating a credible commitment to limit spending. They celebrate, that previous debt ceiling debates have led to concessions, who cut costs. IN 2023 Over the year, many Republicans in Congress have taken notice of this, linking debt ceiling negotiations to their concerns about, that a growing budget deficit threatens the U.S. economy.

But many other economists and policymakers argue, that the federal debt ceiling is anathema to prudent fiscal policy, calling it unreasonable to limit the government's ability to meet financial obligations already established by law. IN 2013 year 97 percent of American economic experts, convened by the University of Chicago, Agreed:, that the US mechanism for raising the debt ceiling could lead to worse fiscal performance . Yellen falls into this camp, claiming, that the debt ceiling is inherently bad for the U.S. economy, because it acts primarily to limit borrowing, that finance previous liabilities.

Ferguson of CFR agrees. “Congress should completely abolish the debt ceiling or, at least, tie it to spending, so that the debt limit is automatically increased every time, When is the spending bill passed?, he writes. “It is time for the United States to abandon this outdated mechanism, which brings the country to the abyss of default every few years".

 

 

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