Here Is The Impact Of Not Raising The Debt Ceiling

With the debt ceiling reached, the United States has begun extraordinary measures to avoid a default. These measures buy Congress five months to approve legislation increasing or suspending the debt limit.

On Thursday, as the United States approached its borrowing limit, the Treasury Department initiated extraordinary procedures to keep paying the government’s bills, setting the stage for what could be a long and contentious fight in Congress on extending the debt ceiling.

Government spending has been restricted by the nearly $31.4 trillion debt ceiling, prompting the Treasury Department to implement extreme measures. Using accounting tricks such as withholding investments for some government accounts until at least early June, the Treasury Department indicated it should be able to make payments to bondholders, Social Security beneficiaries, and others last week.

That’s about five months for lawmakers on Capitol Hill and the Biden administration to adopt a debt ceiling increase or suspension bill. On Thursday, Treasury Secretary Janet Yellen wrote a letter to congressional leaders in which she acknowledged “substantial ambiguity” throughout extraordinary measures.

Ms. Yellen has urged Congress to “act immediately to defend the full faith and credit of the United States.”

Republicans, including new House Speaker Kevin McCarthy (R-Calif.), have opposed extending the debt ceiling unless Democrats agree to reduce government spending. Mr. McCarthy had made budget cutbacks a top focus in the opening few weeks of the narrowly Republican-controlled House, keeping a campaign pledge he made to conservative House Republicans when he was campaigning to become speaker.

Since prior deals to increase the debt ceiling didn’t involve spending cutbacks, President Biden and Senate Democrats vow to resist Republican pressure to eliminate federal services.

So far, investors seem unfazed by the standstill. Experts said that Wall Street is likely to assume that Congress will again take care of the matter because Congress regularly waits until the last minute to raise the debt ceiling following a dispute. But after, the messy process for House Republicans to install Mr. McCarthy as speaker of the House has raised fears about government efficiency. Some politicians and market observers are increasingly concerned about the potential of defaulting this year.

It might be politically risky for House Republicans to reveal which spending programs they plan to eliminate. In terms of politics, there is strong backing for Social Security and Medicare. While many Republicans support a larger budget for the Pentagon, several Democrats and some Republicans consider that as negotiable bargaining fodder. There has been no consensus among Republican legislators on any of the proposals that have been put out.

Mr. McCarthy has asked President Biden to begin discussing the debt ceiling as soon as possible. The White House and Senate Democrats have said they would not talk with Republicans about extending the debt ceiling, insisting that lawmakers should not use it as a bargaining tool on other legislative demands.

Senate Majority Leader Chuck Schumer (D., N.Y.) stated on Thursday that a debt ceiling showdown would be disastrous for ordinary Americans’ economy and lives if the Republicans refused to raise the limit.

There has been at least one Democrat who has shown a willingness to begin talks with Republicans. Sen. Joe Manchin (D., W.Va.), a moderate at the table for most of the Senate’s lawmaking in recent years, said he and Mr. McCarthy had discussed methods to reduce the government deficit by ensuring the long-term financial viability of Medicare and Social Security.

On Fox Business on Wednesday, he said they’re not getting rid of anything, and you can’t frighten the bejesus out of people saying they were doing away with Social Security or that they are going to privatize it—not that’s going to happen. He stated that they must be able to provide certainty so those who have earned it through hard labor are assured of receiving it. And that’s exactly the point they’re making.

When asked about the possibility of discussions between Republicans and Democrats over the parameters of extending debt ceilings, Senate Minority Leader Mitch McConnell (R., Ky.) said he expected there would soon be discussions. The United States, he assured them, will not go bankrupt. On Thursday, he said, “It never has and never will.”

The United States credit rating was lowered, and the financial markets were thrown into disarray in 2011 due to a stalemate over government spending and the debt ceiling. The United States economy and finances would be severely damaged if payments were not made on time. The yield on the 10-year Treasury is used as a standard interest rate of comparison for the whole economy because of the importance of U.S. sovereign debt to the global financial system.

Suppose investors stop believing the United States could pay its obligations. In that case, it may trigger a massive selloff in Treasurys, which would send financial markets into upheaval and drive up interest rates and the cost of borrowing money for the United States. If the United States fails to meet its financial responsibilities, it might hurt the economy for everyone.

Redeeming certain assets in the Civil Service Retirement and Disability Fund, which covers retirement payments for millions of federal employees and retirees, was among the unprecedented actions Ms. Yellen announced the Treasury would take on Thursday. The Postal Service Retiree Health Benefits Fund provides funding for medical coverage for hundreds of thousands of postal service retirees and their covered dependents. The Treasury has decided to stop making certain investments in these funds. Ms. Yellen assured the public that the benefits would be unaffected by the measures and that the monies would be restored later.

Previous fights over the debt ceiling have revealed conversations between Treasury and Federal Reserve officials on potential measures to be taken after extraordinary measures have been exhausted. Treasury officials have questioned the feasibility of prioritizing payments to bondholders out of available cash if the Treasury cannot borrow more money. Meanwhile, the Fed might enter the Treasury market, including perhaps purchasing defaulted Treasurys, though officials have advised against doing so.

Coming close to defaulting on the government’s debt might cause market panic and hamper economic development. Late this year, most experts in the field predicted the U.S. economy to enter a recession. Only a niche portion of the economy has been affected by the debt ceiling in recent years. U.S. Treasury notes with maturities close to the time investors fear the government will have exhausted all of its borrowing options and run out of cash have seen their values fall and their rates rise.

Those investors have kept faith that they will receive their money back. However, due to investors’ aversion to owning bills in which even a little delay might cause significant operational difficulties, investors have opted to hold onto other bills instead.