The U.S. Has Reached the Debt Ceiling: What Does This Mean?

The U.S. reached the debt ceiling on Thursday (18), prompting the Treasury Department to begin taking extraordinary measures to avoid a potential default.But what is the debt ceiling?The debt ceiling, established by Congress, is the maximum amount that the federal government can borrow to finance obligations already approved by lawmakers and presidents—since the government has a budget deficit because revenue is insufficient.The debt ceiling, currently set at $31.4 trillion, was created over a century ago and has been modified more than 100 times since World War II.While it was originally designed to facilitate federal borrowing, the limit has become a way for Congress to restrict the growth of loans. However, the fear of potential defaults has led lawmakers to also pass laws to raise or suspend the ceiling.
It is important to note that raising the ceiling does not authorize new spending commitments. The increase in what can be borrowed can only be used to meet existing financial obligations.What happens if the U.S. defaults on its debt?If the government can no longer borrow, it will not have enough money to pay all its bills in full and on time—including the interest on the national debt. Therefore, it would likely have to temporarily delay payments or fail to meet some of its commitments, potentially affecting Social Security payments, veterans’ benefits, and federal employee salaries, among others.However, no one knows exactly how the Treasury would handle the situation, as this has never happened.A default would also wreak havoc on the U.S. economy and global financial markets, as well as increase borrowing costs. The mere threat of a default in 2011 caused the only credit rating downgrade in U.S. history.What are extraordinary measures?Treasury secretaries are authorized by Congress to take various types of extraordinary measures—behind-the-scenes accounting maneuvers—to avoid default, giving lawmakers more time to raise or suspend the limit.This time, U.S. Treasury Secretary Janet Yellen plans to sell existing investments and suspend reinvestments from the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. She emphasizes that no retiree will be affected and the funds will be restored once the impasse is resolved.Will Congress raise the debt ceiling?If there has never been a default before, why is there concern this time about raising the debt ceiling?The reasons are political. The recent dispute in the House Speaker election raised concerns about whether McCarthy will be able to control the more radical Republicans—who believe that a potential default could be a way to force the government to cut spending.However, the White House said last week that it would make no concessions or negotiate the increase of the debt ceiling.Treasury Secretary Yellen stated that through extraordinary measures, she can hold the situation until mid-year. By then, Republicans and Democrats will need to reach an agreement to avoid the first American default.Source: CNN