On Thursday, The US hit its debt ceiling as Republicans and Democrats in Washington failed to reach an agreement on an increase. The federal government will no longer be able to borrow funds in the short term in order to finance its operations. In the meantime, the Treasury Department will be using intricate accounting measures in order to ensure the government does not default on its debt.
All of this is coming as a result of Congress’s inability to agree on whether to increase the debt limit. The current ceiling that has been hit remains at $31.4 trillion, coming after 2022, which saw a $1 trillion deficit. House Republicans have held out on the vote in order to see more cuts to government spending in exchange for increasing the debt ceiling. Both sides have remained firm in their positions as of now. Republicans have vowed that without any concessions, they will not increase the ceiling. On the Democrats side, President Biden has continued to assert that the cap should be lifted with no strings attached.
The costs of the United States defaulting on its debt would be severe. In America alone we would see an immediate and harsh recession. It would mean the Treasury Department couldn’t pay out Medicare benefits, social security benefits, military salaries, and tax refunds. It would also mean they couldn’t pay back bond holders of US T-bonds, which have historically been seen as one of the lowest risk investments in financial markets.
If this were to happen, investors would lose a lot of trust in the USs ability to repay its debt, which would mean higher interest rates for the US to borrow money. This would make it even harder for the US to repay its debt going forward into the future. It would also hurt the global economy as a whole, as countries have become more interconnected and globalized, a country as big as the US defaulting would mean many other countries being very negatively impacted and possibly having recessions of their own.
The United States defaulting on its debt would be historic. The country has never truly defaulted on its debt, and so many view the likelihood of the U.S. actually defaulting to be very low. This is something that has been echoed by Republican senate minority leader Mitch McConnell, as he has recently stated that he is not concerned that the U.S. will default, and that a compromise will eventually be reached.
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