Sunday, May 21, 2023

 What happens if the US defaults? What you need to know as the debt ceiling deadline nears.

Updated 2:47 pm EDT May. 19, 2023

In a move akin to raising the limit on country’s credit card, President Joe Biden and House Speaker Kevin McCarthy are in a standoff whether to increase the federal debt ceiling for the 90th time since 1959.

In the simplest terms, McCarthy and Republicans, who hold the majority in the House, say they won't support bumping up the limit without assurances from Biden and Democrats that they'll support spending cuts. Biden says he wants the limit raised and the nation's bills paid before he'll agree to spending cuts.

Defaulting on the federal debt isn’t just a government problem. It has the potential to inflict pain across the country, including the stock market, which could translate to job cuts and losses in savings and pension funds.

Debt ceiling created more than 100 years ago

Until 1917, the Treasury Department had to get congressional permission each time it wanted to borrow money. That year, Congress passed the Second Liberty Bond Act, which streamlined the process and set a limit on how much could be borrowed.

In 1939, Congress set a single debt limit ($45 billion, a little over $1 trillion in today's dollars) for the Treasury Department and gave it wider discretion on how to borrow the funds. The law has mutated, but the general concept has remained the same: Congress has to approve increasing the amount, or the government can't borrow more money to pay debts. 

What is the current debt ceiling: $31.4 trillion

The debt ceiling – or debt limit, the amount the U.S. government can borrow to pay its bills – is now $31.4 trillion. Congress last pushed the ceiling up by $2.5 trillion in December 2021. As of Wednesday, the national debt, the amount the government owes its creditors, is actually over the limit: $31.46 trillion, according to the Treasury.

The Treasury has been using "extraordinary measures" to pay our bills since Jan. 19. That's when the country officially crossed the debt ceiling threshold, and Treasury Secretary Janet Yellen first warned that the country could default on its payments later in the year. 

Debt limit increases Congress has approved since 1980

When does the debt ceiling need to be raised?

In recent weeks, Yellen has put a finer point on the X date – the day the federal government would default – saying June 1 might be the last day the U.S. can pay its bills.

Others say that may be overly conservative.

One projection: Default could be several weeks away

Deutsche Bank projected in a report this week that if the federal government avoids default until mid-June, mid-year corporate tax payments could buoy federal coffers through July, but big first-of-the-month payments could make Aug. 1 the X date. Moody's Analytics estimates the X date could be June 8.

Regardless of the X date, Deutsche Bank's trendline still shows the narrow window the Treasury will navigate in the coming days.

When could Congress vote on the debt ceiling?

Both chambers of Congress were in session together on Thursday for the last time in May. They aren't scheduled to overlap again until June 6. That could create more urgency next week for McCarthy and Biden to find common ground.

How many times Congress has raised the debt ceiling: 89

Congress has increased the debt ceiling 89 times under every president with every kind of Congressional balance of power since Dwight Eisenhower.

Congress has also suspended the debt limit multiple times in the past decade. Most recently, Congress agreed to suspend the debt for two years in 2019, which allowed the government to keep borrowing. That suspension ended July 31, 2021. 

What happens if the US defaults?

During the past seven decades, the debt limit negotiations have been a tool for lawmakers to discuss and negotiate about the size of the budget. Those negotiations have become more contentious in recent years – maybe most notably in 2011.

Congress took negotiations to the edge of default in 2011, which sent the stock market tumbling. Americans' investments were further diminished when the near default led to Standard Poor's to downgrade the U.S. credit rating. 

How the stock market reacted in 2011

An actual default might have graver results for Americans and the economy. Moody's warned in a March analysis that credit rating agencies would, again, downgrade U.S. debt, which would again ripple through the financial system and Americans' jobs and finances. 

Without a resolution, some of the dire warnings:

50-year low unemployment rate could rise to 5%, or even 8% in the worst-case scenario, according to Moody's. 

Stock prices could fall as much as 45%, according to Yellen. 

$10 trillion in household wealth could be wiped out, according to Moody's.

Moody's estimates that even a brief default would drive up interest rates, causing a corresponding increase in home loan rates and new monthly mortgage payments. That would further weigh on a housing market that's been driven down by the Fed's efforts to fight inflation through interest rate increases.

Also, checks from the federal government could be temporarily stopped for:

Medicare benefits

Social Security

Military salaries

Tax refunds

Federal workers

Federal contractors

Who owns the federal debt?

The Treasury Department breaks down debt ownership into two categories:

Public: Debt owed to those outside of the federal government, including businesses, banks, insurance companies, pension funds, mutual funds, foreign governments, the Federal Reserve and others.

Intragovernmental: Debt owed by the federal government to another part of itself. This includes federal agencies such as Social Security, Medicare, the military retirement fund and others.

Foreign governments and international interests own about a quarter of the total public debt.

SOURCE USA TODAY Network reporting and research; Associated Press; Congressional Budget Office; Congressional Research Service; Treasury Department; Peter G. Peterson Foundation; house.gov; Bipartisan Policy Center; usa.gov; Committee for a Responsible Federal Budget; Moody's Analytics

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Originally Published 12:28 pm EDT May. 19, 2023

**Updated 2:47 pm EDT May. 19, 2023**

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