This is the decisive moment. President Joe Biden and Republicans in the House of Representatives have only a few days to prevent the country from defaulting on its debt. The US hit the $31.4 trillion debt limit in January, meaning the federal government can no longer accumulate bills (or borrow more money), making it harder to pay bills on time.
How will the debt ceiling deadline affect you? This is a loaded question, so let’s push the layers back. Here’s what you need to know.
What is the debt ceiling?
The debt ceiling was set by Congress in 1917 and limits how much the US can borrow to fund legal obligations imposed by past legislators (Social Security, tax refunds, military salaries, interest payments on outstanding debt, health care benefits, etc.). ). In other words, it limits the amount of US debt. The current debt ceiling is $31.4 trillion.
What does reaching the debt ceiling mean?
Reaching the debt ceiling would not be a hot topic if the country’s revenues exceeded its spending (the government receives money mainly from individual and corporate taxes, but also has other sources such as renting public buildings and land, selling natural resources). and entrance to national parks).
However, the US was not in the black since 2001, meaning that for more than 20 years the government had to borrow money to fund operations. Now that the US has reached its debt limit, there are two options: raise or suspend the limit so the government can pay its bills on time, or face default.
Raising the debt ceiling would be exactly what it sounds like (increasing the limit the US can borrow). The suspension of the debt ceiling means that the Treasury can temporarily lift the ceiling and borrow more than the current limit. If the US defaults, the country will not be able to pay its bills on time, and the economic impact is likely to be felt immediately.
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When is the deadline to raise or suspend the debt ceiling?
In a letter to Speaker of the House Kevin McCarthy on Monday, Treasury Secretary Janet Yellen warned that it was “very likely” that the Treasury Department would be unable to meet its financial obligations unless Congress raised or suspended the debt ceiling as early as June 1. .
“I continue to urge Congress to defend the full faith and confidence in the United States by acting as soon as possible,” she wrote.
What happens if the US defaults?
In March, Moody Analytics Chief Economist Mark Zandi warned that if the US defaulted it would be a “disaster” and Americans would probably pay for the default “for generations”.
For example, government employees and businesses with government contracts may not receive their salaries on time, and social security payments may be cut off. More broadly, it will also lead to “a loss of consumer and business confidence,” he said. Analysts at the Brookings Institution Wendy Edelberg and Louise Scheiner.
Will a default lead to a recession?
In effect, a default would trigger a nationwide economic collapse and trigger an “immediate, sharp recession,” the Council of Economic Advisers said. warned in the beginning of May.
Garry Mamaisky, professor of professional practice at Columbia Business School, spoke about this. Entrepreneur What the government has “many obligations to many people.”
“At some point, when there is not enough money, they have to prioritize who to pay first,” Mamaisky said. “Someone doesn’t get the money they’re owed on time, and that’s going to be devastating.”
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However, the short-term consequences of a default may not be nearly as devastating as the long-term ones — what Mamaisky calls a “reputation issue” that could cast doubt on the credibility of the US as a sensible place to do business.
“This is the biggest risk for me – it’s not something that will happen this year or next year, but will the world perceive the US in 5-10 years as the best country in the world to do business?” He said. “It’s not inevitable, but if Congress doesn’t look into it, they will undermine confidence.”
On Wednesday, leading credit rating agency Finch placed the current U.S. rating of ‘AAA’ in the ‘negative rating’ category, meaning the country’s ideal rating could be downgraded.
“The Negative rating watch reflects a growing political bias that is hindering a decision to raise or suspend the debt limit, despite the rapidly approaching date x (when the US Treasury is depleting its cash reserves and emergency response capacity without incurring new debt).” company said in a statement.
How will the default affect small businesses?
Recent report Goldman Sachs found that 65% of small business owners would be “negatively affected” if the US defaulted on its debt. In addition, 90% said it was “very important” that the government avoid default.
If the U.S. defaults, businesses with government contracts may not see payments, and stores that have customers who rely on food stamps or Social Security to pay for essentials could see costs fall.
“If you are a Social Security recipient and owe rent, you may not have the money to pay rent,” Mamaisky added. “And if a landlord has to pay a utility bill for their building, they may not be able to pay the utility bill because they haven’t received the rent.”
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Moreover, 2011 New York Federal Reserve The report says that small businesses were the hardest hit during the 2008-2009 recession.
Banks are becoming “more selective and risk-averse” in lending during a recession, making it harder for individuals to get credit for small businesses, according to the report.
“Small firms that rely more on external financing and tend to be riskier are more likely to be hit by a credit crunch,” the researchers write.
How many times has the debt ceiling been raised or changed?
Despite the current pressure to raise or suspend the debt ceiling, this is a relatively common practice for the US government. Since 1960, Congress has raised, temporarily extended, or renegotiated the debt limit 78 times to avoid default — 49 times under Republican presidents and 29 times under Democratic presidents, according to the Treasury Department, adding that “Congressional leaders on both sides have acknowledged that it’s necessary”.
Majority recent increase was in 2021 when the debt ceiling was raised by $2.5 trillion.
What prevents you from raising or suspending the debt ceiling?
McCarthy and the Biden administration are negotiating a deal to avoid a federal default. However, they have different positions: McCarthy and Republicans in the House of Representatives are pushing for $3.6 trillion in cuts and caps on future spending on certain programs (which are not listed in the bill) in exchange for a higher debt ceiling, while the Biden administration is focused on raising the limit and paying bills on time before he agrees to any cuts.
On Thursday, the House of Representatives is due to vote on the deal and then take a break while negotiators continue to work on an agreement.
“Following the vote (Thursday), if any new agreement is reached between President Biden and Speaker McCarthy, members will receive 24 hours notice in case we need to return to Washington for any additional votes, either over the weekend or next week”. This was stated by the leader of the majority in the House of Representatives, Steve Scalise. CNN.
What is the 14th Amendment and how does it relate to the debt ceiling?
The 14th Amendment deals with equal protection and other rights such as citizenship, government taxation, and what Congress can regulate. fourth section The Public Debt Amendment states that “the validity of the United States public debt . . . is beyond dispute.”
Given that the US has reached its debt ceiling and may not be able to pay its bills, there is argument that by invoking the 14th Amendment, Biden has the legal right to bypass Congress (which approves any action to raise or suspend the debt ceiling) and, in effect, continue to issue new debt through the Treasury and ignore the debt limit.
Biden supported but was cautious about using the 14th Amendment as a solution.
“The question is, can it be done and called in time so that it is not appealed, and as a result, it passes the specified date and still has not been repaid the debt? This is an issue that I think is unresolved,” Biden told reporters. Sunday, by Wall Street Magazine.
Some experts called the move unconstitutional.
“Even the Biden administration’s flirting with these ideas really suggests that the administration’s loyalty to the Constitution is questionable or opportunistic,” said Philip Wallach, senior fellow at the American Enterprise Institute, a center-right think tank. Wall Street Journal.
Others were more forthright in their opinion of the idea, Yellen said it could provoke “constitutional crisis“, and Representative Chip Roy said that if Biden goes down the 14th Amendment path, Republicans in the House of Representatives “blow shit.”