The United States is facing a looming deadline to raise the debt ceiling, the legal limit on how much money the federal government can borrow to pay its bills. If Congress fails to act by October 18, the Treasury Department will run out of cash and risk defaulting on its obligations, which could have catastrophic consequences for the economy and the world.
What is the debt ceiling and why does it matter?
The debt ceiling is a statutory limit on how much debt the federal government can issue to finance its spending. It was created in 1917 as a way to simplify the process of borrowing money during World War I, but it has since become a political tool for lawmakers to express their views on fiscal policy.
The debt ceiling does not authorize new spending; it only allows the government to pay for what Congress has already approved. The government borrows money by issuing bonds, which are bought by investors such as banks, pension funds, foreign governments, and individuals. The government then pays interest and principal on these bonds over time.
The debt ceiling is currently set at $28.4 trillion, which is roughly equal to the total amount of debt the government owes as of September 30. The government has been able to avoid hitting the limit by using extraordinary measures, such as suspending investments in certain trust funds and swapping debt with other federal agencies. But these measures will run out by October 18, according to Treasury Secretary Janet Yellen.
If the debt ceiling is not raised or suspended by then, the government will not be able to borrow any more money and will have to rely on its cash balance and incoming revenues to pay its bills. However, these sources will not be enough to cover all of its obligations, which include interest on the debt, Social Security benefits, Medicare payments, military salaries, tax refunds, and more.
According to the Bipartisan Policy Center, a think tank that tracks the debt ceiling, the government will face a $118 billion shortfall in November and a $274 billion shortfall in December if the limit is not lifted. This means that the government will have to prioritize some payments over others or delay them altogether, creating uncertainty and hardship for millions of Americans and businesses.
What are the consequences of a default?
A default occurs when the government fails to make a timely payment on its debt or other legal obligations. This would be unprecedented in U.S. history and would have severe repercussions for the economy and the world.
A default would undermine the credibility and trustworthiness of the U.S. as a borrower and a global leader. It would also trigger a sharp increase in interest rates, as investors would demand higher returns for holding risky U.S. debt. This would raise borrowing costs for the government, businesses, and consumers, and reduce economic growth and job creation.
A default would also cause turmoil in financial markets, as U.S. Treasuries are widely used as a safe haven asset and a benchmark for other securities. A disruption in the Treasury market could spill over into other markets, such as stocks, bonds, commodities, and currencies, and create panic and instability around the world.
A default would also have geopolitical implications, as it would weaken the U.S.'s ability to project power and influence abroad. It would also damage the U.S.'s relationships with its allies and adversaries, who rely on the U.S. dollar as the dominant reserve currency and medium of exchange.
Why is Congress deadlocked over raising the debt ceiling?
Raising the debt ceiling has historically been a routine and bipartisan act of Congress, but it has become increasingly contentious and politicized in recent years. Since 2011, Congress has raised or suspended the debt ceiling 10 times, often after tense negotiations and brinkmanship that threatened to push the U.S. to the edge of default.
The current impasse stems from a disagreement between Democrats and Republicans over who should bear responsibility for raising the debt ceiling. Democrats argue that raising the debt ceiling is necessary to pay for spending that both parties have agreed to in the past, including under former President Donald Trump's administration. They also point out that most of the current debt was accumulated before President Joe Biden took office in January.
Democrats want to raise or suspend the debt ceiling through a fast-track process known as reconciliation, which only requires a simple majority vote in both chambers of Congress. However, this would require them to amend their existing reconciliation bill that they are using to advance Biden's $3.5 trillion social spending plan, which could delay or complicate its passage.
Republicans oppose
Source: Conversation with Bing
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