Politicians in Washington are currently negotiating a continuing resolution to fund the government. It’s a big deal, but it’s almost small compared to the next fiscal fight – the debt ceiling.
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While a government shutdown would directly impact millions of Americans, especially federal workers, a United States default on its debt would likely negatively impact almost all Americans.
Hold on, what exactly is the debt ceiling?
Good question. The debt ceiling is the amount of debt the United States Treasury can issue to pay for outstanding obligations. Simply, it’s the United States’ credit line.
The U.S. currently has a debt ceiling of approximately $16.7 trillion. That limit was breached in May, but with some “extraordinary measures” the Treasury has been able to continue to pay the country’s bills. But by late October or early November, if the limit isn’t increased, the Treasury will run out of clever accounting tricks and the United States will go into default, which has never happened before.
So if the debt ceiling isn’t increased what happens?
Nobody knows for sure, which is what makes economists extremely uneasy, though everyone agrees it would be bad.
Thinking positively, the government would still be able to make payments on some of its obligations and that could please financial markets for a short period of time. But if markets turn on the U.S., and borrowing costs increase significantly, the economy will likely suffer immensely.
“If the government can’t pay its bills on time, then some of the people to whom it owes money—whether that’s a construction company, a grandma on Social Security, a doctor treating Medicare patients, a public school expecting Title I funding, a student awarded a Pell Grant, whatever—won’t be able to pay their bills on time.”
Yglesias continues, “That’s going to mean a rise in missed payments on mortgages, car loans, and credit cards. That means bank failures and sharply reduced credit availability even for people who aren’t specifically counting on a check from Uncle Sam. Debt financed investment—construction projects, vehicle purchases, small business expansions—will likely grind to a halt as nobody wants to lend out new money until they’re sure they’re getting paid what they’re already owed. That will create a secondary collapse in incomes, and an additional wave of business and citizens unable to pay their bills.”
That sounds awful, why would politicians let this happen?
President Barack Obama called Speaker John Boehner last week to let him know he isn’t negotiating over the debt limit. Congress just has to increase it.
House Republicans, not surprisingly, disagree, and say they are willing to increase the limit only if Affordable Care Act (Obamacare) is delayed for a year, the Washington Examiner reports.
So someone has to blink. One might think the potential consequences of default are so serious politicians will have to raise the debt ceiling. But this is Washington, where reason doesn’t always win.
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