People walk past the gates of the New York Stock Exchange on March 22. Washington's shrewdness in raising the US debt ceiling has begun to worry some financial markets.Peter Morgan/AP hide title
People walk past the gates of the New York Stock Exchange on March 22. Washington's shrewdness in raising the US debt ceiling has begun to worry some financial markets.
The federal government is in danger of defaulting on the national debt. It's up to Congress to vote to raise the country's borrowing limit, known as the debt ceiling. But House Speaker Kevin McCarthy and President Biden have been deadlocked over Republican demands to tie the debt ceiling to the spending ceiling and other policy demands.
Treasury Secretary Janet Yellen has warned that the country could run out of borrowing authority before June 1, leaving negotiators little time to reach a deal.
Biden recently metWith McCarthy, House Speaker Hakeem Jeffries (D-N.Y.), Senate Majority Leader Chuck Schumer (D-N.Y.) and Senate Minority Leader Mitch McConnell (R-Ky. .) are discussing the way forward. The group has not been able to reach an agreement, but talks are underway at the employee level to avoid default.
Here are nine questions you might want to ask about the debt ceiling and its debate.
What is the debt ceiling?
The "debt limit" or "debt ceiling" is the upper limit on how much debt the federal government can accumulate. The Constitution requires Congress to authorize the issuance of debt. This would allow the government to borrow money to meet its existing legal obligations, such as Social Security and Medicare benefits, military pay, interest on the national debt, tax refunds and other payments.
"It used to be that every time you had an auction of the national debt where you borrowed, Congress would pay for that auction," said Jason Furman, a Harvard economics professor and chief economic adviser to former President Barack Obama. Make a new law."
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"In 1917, the United States needed to borrow a lot of money for World War I," he said. "To streamline that process and make it easier, Congress moved to a new system where they said you can borrow this amount and it comes back to us and we'll collect the money."
Congress increases or suspends78 times more than the debt ceiling since 1960according to data from the Ministry of Finance.
How do experts know when the government has really run out of money?
Economists look at how much revenue a government is expected to receive through taxes, when those payments are expected to arrive in treasury accounts and scheduled debt payments to determine the time schedule, the X-date, by which the debt authorities are likely to spend.
However, there are tools available to the Ministry of Finance,extraordinary measures, to avoid missing out. This includes moving investments and applying accounting tools to move money.
Federal governmentTechnically, the debt ceiling was reached in JanuaryUnconventional measures have since kept payments afloat. Experts cannot determine the exact date when the money will disappear, but they can determine the approximate area where it is expected to fall at some point.At the beginning of June or maybe only in July or August.
What the debt ceiling means for your retirement planning
Why are there disagreements?
Debt is generally an unpopular concept in American politics.
Every vote a lawmaker makes is part of that person's political record, and many lawmakers don't want to be seen applying for additional federal loans or expenses.
Legislators also like to give non-essential priorities to bills that are thought to pass. Because of this, the debt ceiling has become a major target of political battles.
California House Speaker Kevin McCarthy, left, and Senate Majority Leader Chuck Schumer, right, listen to President Biden ahead of a May 9 meeting in the Oval Office on the debt ceiling. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended.Evan Vucci/AP hide title
California House Speaker Kevin McCarthy, left, and Senate Majority Leader Chuck Schumer, right, listen to President Biden ahead of a May 9 meeting in the Oval Office on the debt ceiling. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended.
"Everybody uses [booster accounts] The debt ceiling, their policy of choice," said Maya MacGuineas, chairwoman of the Committee for a Responsible Federal Budget. "The real problem here is that people are now actually talking about default.
In the past, votes to raise the debt ceiling have been relatively quiet and uncontroversial. That changed in 2011, when the country was dangerously close to bankruptcy.
Moody's Analytics analyst Mark Zandi said there have been political battles over debt before, but none as dangerous or consequential as the one in 2011.
"It wasn't clear until the end whether lawmakers had figured out a way to sign the dotted line and raise the border," Zandi said. "I think at one point the stock market was down almost 20% intraday. That's a pretty big market squeeze."
At the time, House Speaker John Boehner, Republican of Ohio, was deadlocked with Obama over spending. Republicans want deep spending cuts and limits on federal spending increases once the cuts are passed.
Obama insisted that Congress raise the debt ceiling without any foreign policies -- known as a clean increase.
Congress eventually agreed to raise the debt ceiling and limit future spending, but not before Standard & Poor's downgraded the US debt for the first time.
Many economists say today's conditions bear an uncanny resemblance to the political struggles of 2011, with serious fears that the country could go bankrupt.
What happens if you don't improve?
The Ministry of Finance will not be able to make payments within the deadline. A missed payment of any kind or amount will be considered defaulted.
The debt ceiling debate could bring the economy to a standstill. that's how we got here
Some Republicans have proposed choosing the debt to be paid off,A system called priority payment.Congress would have to pass legislation to make this possible, which is politically unlikely. It may also be impossible to pull off from a practical standpoint, most experts say, and the idea is not yet being seriously considered as a solution.
Has the US ever defaulted on this debt?
This is part of the reason why the federal government can easily sell stocks and government bonds to investors around the world and why the dollar is one of the most reliable currencies.
"Treasuries are the most trusted debt instrument in the world, so much so that even if there was an economic crisis that happened in the United States, people would come to buy them because of the trust," MacGuineas said. "They believe in America. They believe that if that's called into question, they're going to get paid because we're going to fall behind and not pay the interest that's due. We're never going to be able to get our most trusted people back playing roles in the same capacity that we were before."
Would limiting or cutting spending now solve the problem?
No, the debt limit is tied to money spent on legislation that Congress has already passed.
"As a mathematical result of the laws that Congress has passed, you have to borrow a certain amount," Furman said. "This loan is not a unilateral thing that President Biden wants to do to implement his favorite projects. It's doing what Congress is asking him to do."
In fact, some of the accumulated debt is the result of legislation passed by previous presidents, including Donald Trump.
The spending cap and other changes included in the bill passed by House Republicans are separate policies aimed at addressing future debt accumulation, not the current need to raise the debt limit.
What else does the standard affect?
A US default could have enormous negative consequences throughout the global financial system. Any downgrade of the country's credit rating could cause long-term damage to the value of US government bonds and make the country less attractive for investment.
"I'm really concerned about the real possibility of a default, which is a very dangerous sign that the United States can't govern itself in a way that normally works," MacGuineas said. "We should all be concerned about the debt ceiling itself and what it does to us. political influence."
Zandi warned that the consequences could go beyond investment and credit rates.
"Don't worry about your stock portfolio, worry about your business," he said. "Because a lot of jobs are going to be lost. Unemployment is going to be a lot higher. Is the economy already trying to avoid a recession with high inflation, high interest rates? That's going to put pressure on us for sure, and you know, it's going to be about layoffs. The stock portfolio That's going to be the least of your worries. "
Furman said it could be worse than the 2008 financial crisis, when the collapse of Lehman Brothers triggered the global financial crisis.
"It's probably worse than Lehman Brothers, where everybody was basically asking for their money back because they no longer believed in safety," Furman said. "And you have what amounts to a run on the global financial system."
Is default the same as shutdown?
I do not want. The government shuts down when Congress fails to pass an annual spending bill by the end of the fiscal year on September 30.
The US could run out of cash to pay its bills before June 1, Yellen warns Congress
The two issues are sometimes linked, as lawmakers occasionally extend the debt limit to deliberately align it with the end of the fiscal year to allow broader spending discussions to coincide with the debt mandate.
Is there any other way to solve this problem other than increasing the debt limit?
Most experts agree that current debt relief programs are not working. MacGuineas, who heads the federal budget committee, said Congress should reassess debt and spending priorities, but the debt limit mechanism hasn't really forced them to make a decision.
"The debt limit is a terrible way to try to impose fiscal responsibility," she said. "That doesn't make sense. It says that when you've voted to borrow a lot of money, you have to vote on whether you're actually going to honor those bills. That's kind of silly."
Instead, she proposes a system where Congress agrees to raise the debt limit when it passes legislation.
Other economists have proposed removing the debt ceiling entirely.
Other less popular proposals include minting a $1 trillion platinum coin to pay off the debt or increase it so much that the next debate will stall for years or decades.
Treasury Secretary Janet Yellen reaffirmed June 1 as the “hard deadline” for the US to raise the debt ceiling or risk defaulting on its obligations.What is the explanation of debt ceiling? ›
In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay by borrowing more money, on the debt it already borrowed.What was the original purpose of the debt ceiling? ›
The first debt limit was established to give the Treasury autonomy over borrowing by allowing it to issue debt up to the ceiling without congressional approval, making it easier to finance mobilization efforts in World War I. Before that, Congress generally had to authorize the Treasury to borrow in smaller increments.What is significant about the debt ceiling and how does it relate to government spending quizlet? ›
The legal limit set by Congress on the total amount that the U.S. Treasury can borrow. If the level of federal debt hits the debt ceiling, the government cannot legally borrow additional funds until Congress raises the debt ceiling.What happens if we reach debt ceiling? ›
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession.What would happen if U.S. defaults on debt? ›
U.S. debt, long viewed as ultra-safe
A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $859 billion of US debt.Who owns US debt? ›
There are two major categories for federal debt: debt held by the public and intragovernmental holdings. The debt held by the public has increased by 106% since 2013. Intragovernmental holdings increased by 40% since 2013.Who does the U.S. owe debt to? ›
However, this has declined over time, and as of 2022 they controlled approximately 25% of foreign-owned debt. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).Where does the U.S. borrow money from? ›
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.
Many legal scholars suggest a clause in the 14th Amendment that says the “validity of the public debt, authorized by law ... shall not be questioned” could apply to the debt limit.How much debt does the U.S. have? ›
For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022. Debt-to-GDP is a useful metric for analyzing the debt over long time spans, as it puts the debt into relative terms by comparing it against the size of the national economy.How does high government debt hurt the economy? ›
The national debt also impacts the economy because if it gets too high, consumer and business confidence in the economy may dwindle, which could lead to turmoil in the financial markets and higher interest rates.How does the government spend money when it is in debt? ›
The federal government also spends money on the interest it has incurred on outstanding federal debt. Consequently, as the debt grows, the spending on interest expense also generally grows. If the government spends more than it collects in revenue, then there is a budget deficit.How does government spending reduce the debt? ›
Maintaining interest rates at low levels is another way that governments seek to stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates make it easier for individuals and businesses to borrow money.What happens if we can't raise the debt ceiling? ›
If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.What happens if they don't raise the debt ceiling? ›
There isn't really a blueprint for what would happen. But it would have far-reaching effects. Yellen has said it would destroy jobs and businesses and leave millions of families who rely on federal government payments to "likely go unpaid," including Social Security beneficiaries, veterans and military families.What is the current U.S. debt ceiling? ›
The $31.4 trillion debt ceiling has become a perennial subject of political impasses in recent years, as Republicans seek to limit government spending by slashing social welfare programmes, a prospect many Democrats balk at.What happens if US defaults on debt 2023? ›
Right away, government workers might stop getting paid. Businesses that have contracts with the government might not get paid, and that could mean a lot of layoffs. Social Security checks could stop going out. Also, Wolfers says it would shock financial markets, might even cause a panic.Does the US ever have to pay off its debt? ›
In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
If you stop making your required payments on general consumer debts (like a line of credit, overdraft or credit card), your creditors will generally charge you a fee for defaulting on (missing) payments and start reporting those defaults on your credit history.Does China have more debt than the US? ›
Overall, Chinese government debt is now equivalent to 102% of its GDP, the analysts estimated. That debt ratio is still lower than America's, which is currently about 122%, based on its national debt and GDP in 2022, but China's has grown at a staggering rate, more than doubling from 47% in 2016.What percentage of U.S. debt is owned by China? ›
Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders. Although China's holdings have represented just under 20 percent of foreign-owned U.S. debt in the past several years, this percentage only comprises between 5 and 7 percent of total U.S. debt.How much is US in debt to China? ›
|Rank||Country||U.S. Treasury Holdings|
|3||🇬🇧 United Kingdom||$655B|
To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.Why is the US in so much debt? ›
America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...Does anyone owe the US money? ›
Debts and Debtors of the US Government.
|Country Name||Value of Holdings (Billions of $)|
China's debt is nearly 44% of its GDP and its local governments owe nearly $5.14 trillion. With the economic slowdown and collapse of land sales revenue, provinces and local governments in China are facing an embarrassing situation.Is any country not in debt? ›
The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.Which country has most debt? ›
Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.When did the US start borrowing money? ›
1776: The Birth of Public Debt
In 1776, a committee of ten founders took charge of what would become the Treasury, and they helped secure funding for the war through "loan certificates" (equivalent to bonds) with which they borrowed money for the fledgling government from France and the Netherlands.
Fourteenth Amendment, Section 4: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.Is the U.S. debt the highest in the world? ›
As of 2021 (the latest available data), federal debt reached 115 percent of gross domestic product (GDP), ranking 16th highest out of 164 countries for which the IMF has data. Japan tops the ranking with central government debt of 221 percent of GDP, followed by Greece, Sudan, Eritrea, and Singapore.How much debt does the average person have in US? ›
The average American holds a debt balance of $96,371, according to 2021 Experian data, the latest data available.How much debt is Russia in? ›
The national debt of Russia was forecast to increase between 2023 and 2028 by in total 36.3 billion U.S. dollars (+7.71 percent). This overall increase does not happen continuously, notably not in 2027 and 2028. The national debt is estimated to amount to 507.15 billion U.S. dollars in 2028.How can we solve the debt crisis? ›
- Work out a budget and deal with priority debts.
- Consolidate or refinance loans.
- Get help with late-paying customers.
- Gain better control over your cashflow.
- Reduce unnecessary spending.
- Boost your revenue.
- Engage your staff and seek their input.
One guideline to determine whether you have too much debt is the 28/36 rule. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus debt service, such as credit card payments.Is government debt hurt by inflation? ›
An increase in the price level directly reduces the real value of government debt, as well as the ratio of debt to GDP, because—holding other things constant—higher prices increase nominal GDP.How much credit card debt does the average American household have? ›
|Type of debt||Total owed by an average U.S. household with this debt||Total owed in the U.S.|
|Credit cards (revolving)||$7,876||$488.66 billion|
|Auto loans||$29,107||$1.56 trillion|
|Student loans||$59,461||$1.6 trillion|
At the end of FY 2023 federal debt is “guesstimated” to amount to $32.69 trillion. Thus far, on 2023-05-18, the federal debt is $31.46 trillion. See Coronavirus Update page. Click for federal debt from 1960 to present.How can the government owe money to itself? ›
In fact a country's public debt is not like a household's credit-card balance. When the national debt is owned by its citizens, a country in effect owes money to itself.What would happen if the US printed enough money to cover all the debts? ›
Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse. This would be, as the saying goes, "too much money chasing too few goods."What happens when the debt ceiling isn't raised? ›
If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.What happens if U.S. defaults on debt 2023? ›
Right away, government workers might stop getting paid. Businesses that have contracts with the government might not get paid, and that could mean a lot of layoffs. Social Security checks could stop going out. Also, Wolfers says it would shock financial markets, might even cause a panic.How many times has the U.S. failed to raise the debt ceiling? ›
Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.What does the 14th Amendment have to do with debt ceiling? ›
Legal experts argue that Section 4 of the 14th Amendment allows the Treasury Department to keep borrowing money past the debt limit and that it would be unconstitutional for the U.S. to fail to make payments.What events are causing the U.S. to go into debt? ›
Notable recent events triggering large spikes in the debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic.Will the US ever have to pay off its debt? ›
In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.What is the safest place for money if the government defaults? ›
Treasurys have been seen as some of the safest investments worldwide. They are held by companies and countries the world over and used as collateral in all kinds of financial transactions. If the federal government failed to pay bondholders, it would have unimaginable consequences for the standing of the U.S.
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.Who owns the most U.S. debt? ›
According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $859 billion of US debt.Has the U.S. ever not been in debt? ›
As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.