What you need to know about the debt ceiling as the deadline approaches (2023)

FAQs

What is the deadline for raising the debt ceiling? ›

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.

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.

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.

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.

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.

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.

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.

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).

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.

What does the 14th Amendment say about debt ceiling? ›

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 happens if you don't pay your debt in America? ›

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.

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.

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.

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.

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 ...

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.

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.

Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.

Who controls the money in the United States? ›

The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

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.

As of 2021 (the latest available data), federal debt reached 115 percent of gross domestic product (GDP), ranking 16^th 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.

The average American holds a debt balance of $96,371, according to 2021 Experian data, the latest data available.

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.

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.

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 debt is the US in 2023? ›

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.

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.

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."

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.

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.

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.

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.

Notable recent events triggering large spikes in the debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic.

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.

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.

Does debt go away after 7 years in USA? ›

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.

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.

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.