The government of the United States could default on debt in a matter of weeks, jeopardizing payments to millions of businesses and Americans.
Janet Yellen, Treasury Secretary, warned last week that the U.S. could run out of money as soon as June 1 if legislators don’t suspend or raise the nation’s borrowing limit.
“This would be a huge hit to the economy and really an economic catastrophe,” said Yellen on Monday. “If Congress doesn’t raise the debt ceiling, the president will have to make some decisions about what to do with the resources we do have, and there are a variety of different options, but there are no good options. Every option is a bad option.”
What is the debt ceiling, which has frequently been used as a political pawn, and how might it affect Americans if Congress doesn’t raise the cap?
The debt ceiling, currently around $31.4 trillion, is the legal limit on the total debt the federal government can borrow on behalf of the U.S. public, including Medicare and Social Security, tax refunds, and military salaries.
If Congress does not increase the debt limit, the Treasury would be incapable of paying bills, including government employees, service members, and Social Security beneficiaries, since there would be no cash on hand.
The Treasury Department would be unable to issue any more bonds or bills and would instead have to depend on emergency accounts and tax revenue to pay the bill.
In the worst-case scenario, the U.S. would be so cash-strapped it would have to delay its payment of principal interest on the nation’s debt.
The government came up against the limit in January, prompting the Treasury Department to initiate several “extraordinary” measures to hold off a default.
Default would have severe consequences for millions of people
“A technical default would also have severe consequences for millions of people. Social Security recipients, veterans, U.S. military employees, government employees, defense contractors, among others, would likely go unpaid,” said chief investment officer for Comerica Wealth Management, John Lynch. “The downstream effects of job losses and freezing of the credit markets would be a multiple-quarter hit to GDP, making a deeper recession all but certain.”
The dismal warnings come amid a protracted standoff over the debt limit. The GOP, who control the House, have pledged to raise the borrowing limit only in exchange for significant spending cuts.
For their part, President Joe Biden and his fellow Democrats, who are in control of the Senate, have insisted on a “clean” debt ceiling bill that does not include any cuts that refuse to negotiate.
President Biden hosted GOP Speaker of the House, Kevin McCarthy of California, and other congressional leaders Tuesday at the White House to discuss the nation’s debt and spending; however, the meeting ended with no consensus agreed to.
“I made clear during our meeting that default is not an option,” said Biden after the meeting. “I repeated that time and again. America is not a deadbeat nation. We pay our bills, and avoiding default is a basic duty of the United States.”
McCarthy echoed the president, saying the sides were at a standstill. “I didn’t see any new movement,” he said.
A Friday meeting between McCarthy, Biden, and other congressional leaders has been postponed to early next week.
If the U.S. failed to suspend or raise the debt limit, it would have to eventually default temporarily on some obligations, which could have drastic negative economic implications. Interest rates would likely increase, and demand for Treasurys would drop. Even the prospect of default could cause borrowing costs to rise, said the Committee for a Responsible Federal Budget.
Although the United States has never defaulted on its debt before, it almost did in 2011, when House GOP members refused to pass an increase in the debt ceiling, prompting the downgrading of the U.S. debt rating one notch by rating agency Standard and Poor’s.