Hi guys!
You might have heard on the news recently about the “US debt limit crisis.” This news piece, if not resolved might be one of the most consequential events in the past decade or longer.
Here’s the scoop:
According to the US Treasury, the US debt limit is:
the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Basically, it’s the amount of debt that the US is allowed to accumulate. It limits how much money the Treasury can borrow to pay off those debts. This definition, though rather hazy, will develop as we move forward.
The debt limit has been a source of controversy since it was implemented over 100 years ago; attempts have been made to abolish it, and sometimes congress temporarily suspends it, allowing the government to borrow beyond its limits. As a rapidly growing nation, the United States has seen its debt expand significantly, with current levels in the tens of trillions. Seventy-eight times, the debt limit has been raised to accommodate, ensuring that America doesn’t default. That’s not to say this action hasn’t been controversial; starting in 2011, former President Barack Obama and the Republican-controlled Congress engaged in a deadlock that was only broken two days before the Treasury ran out of money. Now, the United States is nearing that point again, with dire consequences if unresolved.
Currently, the Congressional Budget Office projects that the country will once again reach the debt limit between July and September of this year, and the Treasury Secretary has warned it could happen a month sooner. Knowing that the US simply cannot default, politicians should be agreeing on something for once, right?
Wrong.
President Joe Biden and the Republican-led House of Representatives have reached a stalemate quite similar to the one only 12 years ago; the two branches of the government, being political opposites, have different agendas. Biden has made clear that he will veto anything but a no-strings attached debt limit raising; Republicans are arguing that spending is out of control, and needs to be limited. House Leader Kevin McCarthy wrote on Twitter:
“If you gave your child a credit card and they kept hitting the limit, you wouldn't just keep increasing it. You would sit down with them to identify where they are overspending and where they can change their behavior, it’s time for the federal government to do the same thing.”
(It should be noted that raising the debt limit is not a purely Democratic action; in fact, more than half of them were done under Republican presidents.)
Republicans have put forward a bill that would approve raising the debt limit, while at the same time cutting federal spending by 14%; the President promises to veto this plan if it passes. Neither side is willing to yield, but something has to be done.
The US reaching the debt limit would have massive effects on the world economy. Here’s just a few:
The US government, being unable to spend much on anything, would hamstring the ability of the government to finance defense, and Medicaid and Social Security would fall apart.
There would be increased borrowing costs for everyone, and the drop in consumer confidence would deliver a shock to the fragile US economy.
3 million jobs would be lost, and mortgages would cost hundreds of thousands of dollars more.
Ironically, the rise in interest rates would increase the national debt by $850 billion.
The crumbling of the powerful US economy would likely bring the rest of the world down with it.
Treasury Secretary Janet Yellen gave her description of what would happen if the US reached its debt limit, and I think it sums it all up well:
“…Economic calamity.”