What To Know as Republicans and Biden Prepare for Debt Ceiling Battle

TThe biggest fiscal battle of the year is the one over raising the federal budget. debt limit. Here’s what you can expect. the showdown intensifies Over the next months.

What is the maximum amount of debt?

The U.S. debt limit refers to the maximum amount that the government can borrow.

The debt ceiling was first created It was first set at $11.5 Billion in 1918. The first aggregate debt limit, which covered nearly all government debt, was set by Congress in 1939 at $45 Billion.

Congress is the only institution that has authority Over raising the limit. Currently, the borrowing ceiling (also known as the debt limit) is $31.4 trillion. This level was last raised two years ago.

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About $24.5 trillion of that $31.4 trillion debt is held by the public. Nearly $7 trillion is intragovernmental debt, which is mainly held in trust funds such as those for Social Security.

Federal debt as a percent A staggering 120% of gross domestic products is recorded. The federal debt surpassed 100% of GDP in 2014, but it was higher than that in the wake of World War II.

The debt limit has been increased nearly 100 times by lawmakers since its inception to stop the United States from defaulting. Democrats are calling for Congress to do so again this year. House Republicans are now majority and want to get concessions from President Joe Biden to vote to raise the ceiling.

What does the debt limit have to do with a government shutdown

The threat represented by the debt ceiling is not the same as the threat of a government shutdown — it’s much more serious. Many people confuse the two situations, including some lawmakers and those who are reading the news.

When Congress disagrees with the funding of future spending by government agencies, there can be a government shut down. The government shuts down can result in some workers being furloughed and certain government services going unprovided. The 2018-2019 shutdown saw some national parks fall into disrepair while craft beer makers were unable to get labels for their goods. As it was during the shutdowns of other government agencies, the economic consequences were not severe.

However, the Treasury can use the debt ceiling to raise funds to pay for spending that has been approved in the past. No new spending can be authorized by raising the debt ceiling. Instead, it allows the Treasury to make pay incoming bills — most significantly, the interest payments owed on the debt.

Modern times have seen the United States never fail to pay interest on its debt (aside from failing to pay smaller investors on time). in 1979 Because of a problem in the payment processing system

When will the debt limit become enforceable?

Janet Yellen, Treasury Secretary to Janet, stated last week that the Treasury expects the debt limit will be reached on Thursday.

As Friday drew near, the limit on the amount of debt was $31.3 trillion.

What happens when the limit has been reached?

When the limit is reached, the Treasury may no longer issue new debt — that is, Treasury bills, notes, and bonds.

Treasury will issue new debt to pay government bills. “extraordinary measures” to free up cash — essentially, shifting money around government accounts.

The Treasury may, for example stop payments to certain government pension funds and can redeem Treasury bonds in advance that have been held in the retirement savings accounts federal employees.

According to the Committee for a Responsible Federal Budget these measures were used at least 16 times since 1985 when they were first introduced. They have also been used as recently as 2021.

The extraordinary measures will end eventually, however. They will be enough to keep the U.S. afloat through June 1, according to Yellen. This sets a rough deadline for congressional action.

The Treasury will not be able guarantee its ability to make all payments in full and on time at some point. The Treasury will no longer be able to guarantee that all payments are received on time and in full. This is called the “The Observer”. “X-date.”

The Treasury is responsible for paying bills in lumps. For example, the Treasury could have to pay $4Billion for federal salaries and $30B for Medicare the next day. The Treasury could also be responsible for the $40Billion interest bill. Tax payments might be made to the Treasury on occasion. It may run out of money at one point to fully pay a bill.

In theory, at that point the Treasury would need to decide whether it will make all payments or just some. Or if it will delay future payments. Some options would be difficult, like withholding Social Security checks for disabled recipients. Others would be impossible, such defaulting on interest payments on the debt. It is recommended that the Treasury prioritize interest payments on the bonds, since Treasury securities are the backbone of the global financial system.

Past Treasury secretaries of both parties have said there is no workable plan for prioritizing payments — that doing so would not be feasible.

However, Congress Republicans have in the past drafted legislation to prioritize payments if there is no debt ceiling.

What would happen if the US defaulted?

There are fears that defaulting on debt could have devastating effects on the economy. The global view of Treasury securities as a safe asset could lead to doubts about payments. This could result in interest rates rising and profound knock-on effect for almost all financial instruments.

A default would have a similar effect on the economy as the Great Recession, which was the worst economic downturn since the Great Depression, according to a report by Moody’s Analytics. Moody’s predicted in 2021 that the fallout would be so severe that investors would panic and pull their money from the stock market, causing stocks to plunge A staggering 33%.

“Stock prices would be cut almost in one-third at the worst of the sell-off, wiping out $15 trillion in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates spike, at least until the debt limit is resolved and Treasury payments resume. Even then, rates never fall back to where they were previously,” said Mark Zandi, Moody’s chief economist.

Despite never being able to default, the economy suffered a severe blow during the 2011 debt limit crisis. Stock prices dropped in the year leading to the agreement to raise it. They had to wait half a decade to get there. recover fullyAccording to the New York Times. Additionally, credit rating agency Standards & Poor’s downgraded The U.S. economy based on its AAA rating.

What is the difference between these two sides?

So far, Republicans made it clear that they are willing to use this moment to reduce federal debt and spending.

McCarthy indicated on Sunday that it was open to working with President Joe Biden as well as congressional Democrats to reach a compromise to reduce government spending and avoid default. Details of the exact number and demands for this deal are not yet clear.

“I want to sit down with him now so there is no problem,” Fox News interviewed McCarthy. “I’m sure he knows there’s places that we can change that put America on a trajectory that we save these entitlements instead of putting it into bankruptcy the way they have been spending.”

“I believe we can sit down with anybody who wants to work together. I believe this president could be that person,” He said.

Hakeem Jeffries (D,NY), House Minority Leader has accused Republicans that they put the country in danger over the debt limit showdown. He warned of the possibility of economic collapse in a recent interview with NY1.

“In our country’s history, which is about 247 years old, the United States of America has never defaulted on our debt. And if we were to do so, because of extremist Republicans in the House, that will have grave consequences for Social Security, for Medicare, for the economy and the, in fact, not just for the country but for the world,” Jeffries said.

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Yellen also stressed how serious the consequences could be if the government continues to move towards default. Last week, she wrote that even the notion that the U.S. could default could hurt the economy.

“Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” Yellen said.