What the Federal Debt Limit Confrontation Might Mean for You

What the Federal Debt Limit Confrontation Might Mean for You

Time is running out on the federal loan limit.

Lawmakers have time to increase the loan limit again by the end of the month. In an op-ed for the Wall Street Journal on Sunday, Treasury Secretary Janet Yellen said failure to act could lead to economic devastation.

While the legal limit on how much America can borrow doesn’t affect consumer spending, if Congress can’t agree on a new debt limit by October, it could affect everything from government payments to capacity. Will focus on Borrow, he warned.

“In just a few days, millions of Americans could be strapped for cash,” Yellen said.

“Almost 50 million older people could stop receiving social security checks for some time. Soldiers cannot be paid. Millions of families who rely on the monthly child tax credit could experience delays.

Why the federal loan limit keeps increasing

Federal debt is the amount the government currently has to spend on payments such as social security, medicare, military balances, and tax refunds.

The debt limit allows the government to finance these existing obligations.

Yellen said, “The increase in the loan limit does not authorize additional spending of taxpayer money. Instead, when we increase the loan limit, we are effectively agreeing to increase the country’s credit card balances. “

Congress and the White House have changed the debt limit nearly 100 times since the end of World War II, according to a responsible federal budget committee. In the 1980s, the debt ceiling rose from less than $ 1 trillion to almost $ 3 trillion. During the 1990s, this amount doubled to almost $ 6 trillion, and doubled again in the 2000s to over $ 12 trillion.

In 2019, Congress voted to suspend the debt ceiling until July 31, 2021. Now the Treasury is using temporary “emergency measures” to gain more time so the government can meet its obligations towards duty bearers, ex-combatants and social security beneficiaries.

But once the government ends these measures, it will no longer be able to issue debt and could run out of cash.

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Of course, the US government has never defaulted on its debt and that is not expected at this time either. However, the risk of default has returned on several occasions. And even that has consequences.

Some economists expected Senate Democrats to include an increase in the debt limit as part of a $ 3.5 trillion spending plan.

However, the budget proposal omitted the cap entirely, and the government would be on the verge of defaulting just as Republicans and Democrats disagree on the amount of federal spending.

“It’s a chicken financial game,” said Mark Hamrick, senior economic analyst at Bankrate.com.

Why only the threat of default has consequences

In the worst-case scenario, the federal government will likely default on some of its obligations, at least temporarily, including Social Security payments, veterans’ benefits, and federal worker wages.

In addition, a possible downgrade of the US credit rating will impact the Treasury. Demand for US Treasury bonds could drop if they are no longer viewed as a reliable and safe investment, and bondholders will demand significantly higher interest rates to offset the increased risk.

In turn, other borrowing costs, including rates on credit cards, auto loans, and mortgages (which are typically indexed to the yield on U.S. Treasuries), will be higher.

At the very least, the fear of default could stir up the stock market and send shockwaves through the economy, according to Bankrate’s Hamrick.

“If you go back ten years ago, there was an immediate liquidation in the financial markets – it hit investors hard and risked a wider financial crisis,” he said.

We have learned from past deadlocks over credit limits that waiting until the last minute to suspend or increase a loan limit can cause serious damage.

In 2011, a deadlock on the debt ceiling in Congress brought the country closer to default before lawmakers finally reached a deal, but not without a deterioration in the country’s credit rating and significant volatility. of the market.

The S&P 500 sank more than 18% between July and October of the same year.

This time around, lenders could start tightening their standards earlier to reduce the risk – or risk – of what could be a controversial battle, he said. Yiming Ma is an assistant professor of finance at Columbia University Business School.

“No one thinks it will be a direct default, but even this uncertainty can affect loan terms and credit availability,” she said.

“If I were a loan taker I would look at the terms now,” Ma said. “In the last few days there can be a frenzy. “

“We have learned from the previous deadlock on the loan limit that waiting until the last minute to suspend or increase a loan limit can seriously hurt business and consumer confidence, increase the cost of borrowing. short term for taxpayers and increase United’s credit rating. ” This could have a negative impact on the ratings. States, ”Yellen also wrote in a letter to House Speaker Nancy Pelosi earlier this month.

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