Clipped from: https://www.thehindubusinessline.com/blexplainer/bl-explainer-what-if-us-debt-ceiling-is-not-raised/article66829786.ece
Moody’s Analytics predicts that a four-month default would shave around 4 per cent from US GDP and result in companies slashing nearly seven million jobs
The debt ceiling, also called the debt limit, is the total amount of money the Federal government can borrow for meeting its expenses on social security, medicare, military wages, interest on the national debt, tax refunds, etc. The Federal government is authorised to borrow via US Treasury securities, such as bills and savings bonds.
As the US government spends much more money than it receives in taxes and other revenue — it has run a deficit averaging nearly $1 trillion every year since 2001 — raising or suspending the debt ceiling becomes necessary to borrowing further. For much of the past century, raising the ceiling has been a relatively routine procedure for Congress. Whenever the Treasury Department could no longer pay the government’s bills, Congress has acted quickly and sometimes unanimously to increase the limit on what it could borrow.
According to the US Treasury Department, the debt ceiling has been raised, extended, or revised 78 times since 1960, most recently in 2021. This occurred 49 times under Republican presidents and 29 times under Democratic presidents.
America hit the debt ceiling, which currently stands at around $31.4 trillion, on January 19. US Treasury Secretary Janet Yellen has warned that the Federal government could run out of money by early June if the Congress does not approve a higher debt ceiling. The Republicans in Congress, however, have sought to tie raising the debt limit to slashing of spending on government programmes and steep spending cuts by the Biden administration.
Without an agreement to increase, Treasury Department has been using “extraordinary measures” to continue paying the government’s obligations and buy time for the Congress to raise the cap. The measures are basically fiscal accounting tools that curb or suspend certain government investments so that the bills continue to be paid. These options could be exhausted by June, after which it would be unable to issue new debt and pay its bills.
In mid-January 2023, Treasury Secretary Janet Yellen reiterated the importance of Congress raising the debt ceiling to avoid a potential default. The US has never defaulted on its payments before. Yellen, in a letter to Congress last week, wrote: “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States.”
The government will run out of money and default on its obligations to creditors and citizens. It would delay, or no longer be able to pay, salaries of federal and military staff, or pensions. It would also impede the government in adequately funding the public health system. The economy could quickly shift into reverse. Moody’s Analytics predicts that a four-month default would shave around 4 per cent from US GDP and result in companies slashing nearly seven million jobs.
Global investors would see the US as a less trustworthy borrower, and this could see interest rates on its debt going up.
Experts say any hit to the confidence in the US economy could rattle global financial markets. With trillions of dollars of global financial assets tied to the value of the US bonds, any default in debt payments could see bond prices plummet. This will weaken the dollar as well. And as over half the world’s foreign currency reserves are held in dollars, the value of these reserves will also drop.
These developments will, however, give a leg-up to countries such as Russia, China and India which are pushing for de-dollarisation.