From the BBC:
“What happens now the US has
hit the debt ceiling?”
The US has hit its debt limit,
with the Treasury Department now taking measures to prevent a potentially
devastating default. Reaching the debt ceiling means the government is not
allowed to borrow any more money - unless Congress agrees to suspend or change
the cap, which currently stands at almost $31.4tn (£25.4tn). Typically that is
what happens. Since 1960, politicians have moved to raise, extend or revise the
definition of the debt limit 78 times - including three just in the last six
months. But fresh tensions in Congress, where Republicans recently took control
of the House of Representatives and are calling for spending cuts, have raised
concerns that politicians will delay acting this time - potentially leading the
US to intentionally default for the first time in its history.
What will the US do now? For
most of us, the impact should be barely noticeable - at least in the first few
months. The US Treasury can manage the situation by taking measures to
avoid actually breaching the limit. In the past, this has included steps such
as suspending investments it is supposed to make into retirement and health
benefit funds for federal employees - then re-topping those funds at a later
date. In a 19 January letter, Treasury Secretary Janet Yelen announced a
similar "debt issuance suspension period" for the Civil Service
Retirement and Disability Fund (CSRDF) through 5 June, as well as the
suspension of payments to the Postal Service Retiree Health Benefits Fund (PSRHBF).
"By law, the CSRDF and PSRHBF will be made whole once the debt limit
is increased or suspended," the letter added. "Federal retirees and
employees will be unaffected by these actions." But even delays do
have a real price. The stand-off on the issue in 2011 prompted the
S&P credit ratings agency to downgrade the country's rating - a first for
the US. Government analysts have estimated that delays that year caused
the cost of borrowing for the US Treasury to increase by at least $1.3bn, as
investors demanded higher rates due to the uncertainty. Analysts are already
expecting debate on the issue this year to make financial markets jumpy.
Then, economic catastrophe Treasury
Secretary Janet Yellen has estimated that special measures can buy time for the
US until at least June, at which point the government will no longer be able to
pay its bills. That is the scenario many analysts see as a true economic
catastrophe. In the event, some say authorities would have to do as much
as they can to avoid default. That would mean finding ways to make interest
payments while other obligations go unpaid, such as defence contractor
payments; Social Security cheques, received by retirees across the country; and
salaries of government employees, including the military. Even something
as basic as weather forecasts could be affected, since so many rely on data
from the government-funded National Weather Service. A default could
ruin the country's trustworthiness, roiling global financial markets, where US
debt is heavily traded and has traditionally been viewed as low risk. The
dollar would weaken and borrowing costs would spike - at first for the
government but ultimately for the broader public, in the form of higher
interest rates for mortgages, credit card debt and other loans. Getting
to that point would be unprecedented, and cause widespread damage to consumer
confidence and the economy, which is already in a precarious state. "Failure
to meet the government's obligations would cause irreparable harm to the US
economy, the livelihoods of all Americans and global financial stability"
Ms Yellen warned recently.
Why has this become an
increasing problem? The debt limit was first introduced in 1917, as a way
to give the government flexibility to raise money during the First World War.
In theory it gives Congress a way to check in on spending. But fights over the
ceiling have become increasingly fractious, as political polarisation increases
and US debt has skyrocketed, roughly doubling in a decade. That is due in part
to major government spending during the financial crisis and the pandemic - but
it is also a reflection of the fact that the country has consistently run a
budget deficit - spent more than it raised - every year since 2001. Now,
the debt ceiling is a perennial political bargaining chip. The 2011
fight over the debt limit was resolved when then-President Barack Obama agreed
to spending cuts worth more than $900bn - and the debt limit was lifted by a
similar amount. Some Republicans are pushing for spending cuts again
this time - a position that Democrats have rejected.
^ It seems that Congress and the
President (no matter who is in charge - Democrats or Republicans) are
constantly making Americans worry about either a Federal Government Shutdown or
the Debt Ceiling.
Everyone in Washington DC needs
to get their acts together and get things done. ^
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