Explain the Budget Default, Debt Ceiling

[Herodotus]

I interrupt the usual array of shit pics, trolling, picking on ICR's empassioned defence of transgender rights, trump worship, "Putin Ball licking" and jacking off to Ukrainian nazism, to ask about something that should concern most of us, at least those of us in the USA.  What exactly happens to our government, our economy, our society etc if the debt ceiling is not raised? Does government get shut down like 2018? Does grandma get her social security check? Will my stock portfolio get wiped out? Will loans and banks fail? Please explain.  What happens if the morons in DC can't get their heads out of their asses and come to some sort of agreement?

[Woody]

It's hard to tell what is going to happen.  The debt ceiling might get raised, or the government might shut down until a CR is ironed out.  Worst case scenario is the government defaults.  In that case, just look at your life and imagine it being ten times suckier. 

 

 

[HipKat]

What could happen if it's not raised?

The Treasury Department would be unable to make payments when they are due. Missing a payment of any kind or size would be considered a default.

Some Republicans have suggested choosing which debts to pay, a system called payment prioritization. Congress would have to pass a law to make that possible, which is politically very unlikely. Most experts say it might also be impossible to execute from a practical standpoint and the idea is not being seriously considered as a solution at this time.

Has the U.S. ever failed to make these debt payments?

No.

And that is part of why the federal government is able to easily sell share Treasury bonds to investors across the globe and why the U.S. dollar is one of the most trusted currencies.

"Treasuries are the debt vehicle that are most trusted in the entire world to the point where even if there is an economic crisis that originated in the U.S., people come and buy treasuries because they trust them," MacGuineas said. "They trust the U.S. they trust the fact that they will get paid if that is called into question, because we actually do start to default and we don't pay the interest that is due. We will never be able to regain that most trusted role in the same capacity we had before"

Would capping or cutting spending now resolve the problem?

No, the debt limit is related to money that has been spent as a result of laws Congress already passed.

"As a mathematical consequence of the laws Congress already passed, you have to borrow a certain amount," Furman said. "This borrowing isn't some unilateral thing that President Biden wants to do in order to do his favorite projects. It is in order to accomplish what Congress told him to accomplish."

In fact, some of the debt being accumulated is the result of laws passed under former presidents, including Donald Trump.

Spending caps and other changes included in a bill passed by House Republicans are separate policies intended to address future debt accumulation, not the current need to increase the debt limit.

What else could be affected by a default?

A U.S. default could cause a huge ripple of negative consequences throughout the global financial system. Any hit to the country's credit rating could do long-term harm to the value of U.S. treasuries and make the country a less appealing investment.

"I am truly concerned there is an actual chance of default and that is so dangerous and such a sign that the U.S. is not able to govern itself in a way that is functioning," MacGuineas said. "We should all be worried both about the debt ceiling itself, but also about what it says about our politics."

Zandi warned that the consequences could go beyond just investment and lending rates.

"Don't worry about your stock portfolio, worry about your job," he said. "Because a lot of jobs are going to be lost. Unemployment is going to be a lot higher. Is the economy struggling already trying to avoid recession because of high inflation, high interest rates? This will certainly push us and, you know, it's going to be about layoffs. Stock portfolios will be the least of people's worries."

Furman said it could be worse than the 2008 financial crisis when the fall of Lehman Brothers Bank triggered a global financial crisis.

"It could be worse than Lehman Brothers, where everyone basically demands their money back because they don't believe the collateral anymore," Furman said. "And you have the equivalent of a run on the global financial system."

Are there other ways this problem could be fixed, aside from just increasing the debt limit?

Most experts agree the current debt limit process isn't working. MacGuineas of the Committee for a Responsible Federal Budget said Congress should be reassessing debt and spending priorities but the debt limit mechanism does not actually force them to make choices.

"The debt ceiling is a terrible way to try to impose fiscal responsibility," she said. "It doesn't make sense. It says after you vote to borrow a lot of money then you will then vote whether to actually make good on those bills. That's a dumb approach."

Instead, she suggested a system where Congress agrees to increase the debt limit when they pass legislation.

Others economists have suggested abolishing the debt limit entirely.

Other less popular proposals include minting a $1 trillion platinum coin to cover the debt or raising it so high that the next debate will be stalled for years or decades.