Everything You Need to Know About US Debt Ceiling and How It Affects You?

On debts, there has never been a default by the US government. However, with the Senate Republicans’ blockade last September, the nation’s financial history threatened to be thrown into disarray.

Debt limits, or the amount of money the government can borrow legally, are at the heart of the congressional fight. If the debt limit is not raised or suspended, there would be serious financial consequences that would impact all parts of the US economy.

The US Treasury is funded through the end of this month under a temporary measure passed by the US Congress in October. By Dec. 15, US Treasury Secretary Janet Yellen has warned that government funds may run out. With the passage of a new bill in the House of Representatives, the Senate is once again scrambling to raise the debt limit.

The US economy will almost certainly suffer at a macro level if the debt ceiling is not raised or suspended, with experts predicting interest rate spikes and falling stock prices.

Moreover, the effects of a spending freeze will surely be felt by individuals, as a freeze might lead to the reduction or elimination of funding for essential programs, such as food assistance for low-income Americans, Medicare, and Social Security.

Read More: Final Stimulus Check Of 2021 Arriving Out Next Week

Debt ceiling: What Does it Mean?

Debt ceilings, sometimes known as debt limits, is how much money the US Treasury Department is allowed to borrow to pay its bills. In order to pay for most essential functions, the US government borrows money because it cannot collect enough income taxes to pay for them.

As part of its responsibilities, the government pays for Social Security and Medicare benefits, pays the salaries of military personnel, issues tax refunds, and services its already large national debt, which is approximately $28 trillion at the present time.

The Current Debt Ceiling Expires on What Date?

78 times since 1960, Congress has increased, extended, or revised the Treasury Department’s borrowing limits. According to Yellen, if Congress does not act by the end of the week, the United States may default on its debts by the 15th of December.

What is the Current Situation?

Earlier in October, Mitch McConnell told President Biden and finance executives he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels in December.” He said this in a tweet he issued.

Despite the Senate raising the debt limit on Oct. 7, the increase was only temporary, since it only allowed Treasury to borrow enough until December. This was followed by the House.

On Tuesday, the US House passed a bill that establishes new procedures for raising the debt limit in the Senate. The procedure requires only a simple majority of Senate votes to pass a vote on the issue rather than 60 votes.

Continuing in the House’s footsteps, the Senate has begun considering a bill to implement this fast-track procedure. Getting the bill passed in the Senate would require support from at least ten Republicans.

Due to a deal struck by Senate leaders, it is likely today’s legislation will pass the Senate with those votes. By the end of the week, Congress is likely to increase the debt limit if the bill passes today.

There is no word yet on how much Congress will increase the debt ceiling. if passed, GOP officials can then “wash their hands” by letting Democrats raise the debt ceiling independently.

Read More: Senate Democrats Prompt Biden to Waive Student Loan Interest When Payments Resume

What is the GOP’s Reasoning for not Raising the Debt Limit?

Even though both Democrats and Republicans voted on three occasions during Donald Trump’s presidency to raise the debt ceiling. Senator Pat Toomey of Pennsylvania said Republicans are trying to portray raising the debt ceiling as enabling a “spending binge.” Sen. Pat revealed the latter when he spoke in September at a Banking, Housing, and Urban Affairs Committee hearing.

What is the Purpose of the Debt Ceiling?

The debt ceiling “was instituted by Congress during World War I to give the Treasury Department more discretion in making federal spending decisions,” said Perry Adair, a consultant with a federal lobby team with Becker Lawyers.

“Before the limit, Congress had to issue bonds individually — in the same way they passed any other bill.”

Since Congress had to approve each bond separately, it was significantly harder to finance the war. To alleviate this burden, Congress established the debt ceiling. As a consequence, Congress nowadays has the option of either raising the debt ceiling or suspending it all together, according to Adair.

Is Raising the Debt Limit Different from Suspending it?

“Raising it would simply increase the amount of debt the country can take on,” Adair explained.

“Suspending it would instead allow for limitless borrowing until a date Congress specifies.”

Without a Debt Ceiling Increase or Suspension, What Will Happen?

It’s not clear what will happen. There has never been a situation like this before. Though for sure, the impacts on the US economy could be devastating and there could be a ripple effect worldwide. In fact, many US officials have warned about this very thing. The result would “produce widespread economic catastrophe,” Yellen said in The Wall Street Journal.

Rather than relying on its cash reserves, the US would have to finance its debt obligations from what it has on hand, if forced today. In the event that the government burns through that, it likely would default on the remainder of its debts.

Would the US be able to Avoid a Default by Issuing a Trillion-Dollar Coin Minted from Platinum?

The debt ceiling debate has a reviving wonky idea:

A default will only occur if the US Treasury cannot pay its debt, so why not make a trillion-dollar platinum coin, settle the entire debt once and for all.

During Barack Obama’s presidency, a trillion-dollar coin was proposed as part of a debt ceiling fight. During this year’s debt ceiling crisis, the idea returned to the forefront after going quiet for several years.

According to the Coinage Act, the US Treasury can only issue a certain number of gold, silver, and copper coins at a time. Nonetheless, subsection (k) of the act doesn’t stipulate a limit on how many platinum coins can circulate, nor does it dictate a maximum value for the coins.

The US government could easily wipe out its debt without resorting to raising its debt ceiling if it minted such a coin. However, this is purely a theoretical idea and has not been tested by professionals. Meanwhile, on CNBC, Ms. Yellen called the trillion-dollar coin “a gimmick” and stated that “it’s necessary for Congress to show that the world can count on America paying its debt.”

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What Would the US Economy Look Like if it Defaulted?

There would be an acute and wide-ranging impact. Social Security and Medicare would cease to exist for millions of Americans. Only certain essential federal employees will be allowed to work.

All US troops and federal workers will no longer receive paychecks. Approximately 6 million jobs would be lost, the unemployment rate would rise, and the GDP would decline, according to a report published by Moody’s Analytics. As well, the credit record of the country, at least as it relates to paying its debts, would be irreparably tarnished.

“Internationally, the United States will have for the first time undermined the full faith and credit of its own currency — a blow to our standing in the world and a boon for our adversaries such as China who are arguing to the world that the US is on the decline,” Adair added.

What Effects Might it Have on Me?

Economically disadvantaged people will be disproportionately impacted by such a catastrophe as they have been by so many others. There would be a halt to food assistance across the nation, delayed child tax credits, and a halt to compensation for veterans and pensions. Federal funding would no longer be available to states or local governments during crises like COVID-19 or natural disasters.

We’re still grappling with the COVID-19 pandemic, so the debt ceiling standoff will even be more problematic. Defaulting “would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency,” Yellen noted.

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