For months, talk about the debt-ceiling crisis has been discussed on many news broadcasts. The showdown has been between the Democrats (for raising the national debt ceiling) and the Republicans (against it). The disagreement centers on some debt-ceiling issues that are yet unresolved between the two parties.
About the Debt Ceiling
The debt limit, also called the debt ceiling, is the amount of money the U.S. Treasury is allowed to spend to pay the nation’s bills. The agency does not have the power to create new commitments on spending. America has never defaulted on paying its bills, but if it did, turmoil would result—nationally and internationally. Currently, the debt ceiling stands at $31.4 trillion.The U.S. Treasury says that raising the government debt ceiling is not unusual. It has been raised 78 times since 1960, and more often by Republican presidents (49 times) than Democratic ones (29 times). The Council on Foreign Relations (CFR) reports that the national debt has almost tripled since 2009.
Options for Raising the Debt Ceiling
If the debt ceiling is not raised, Congress has two other options. The CFR reveals that it can either suspend the debt ceiling or permit the Treasury to spend more than the debt limit for a limited time. Since 2013, suspensions of the debt ceiling have occurred seven times.Another option, according to the Committee for a Responsible Federal Budget (CRFB), is that the Treasury Department can resort to “extraordinary measures.” To do so, it will use available cash, which recently included the premature cashing of Treasury bonds in the federal employee retirement savings accounts, then to be replaced later with interest.
A Possible Settlement Made
The two parties finally made an agreement on May 28. The two parties, President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) chose to suspend discussing the debt-settlement issue until 2025. After that date, there are no caps on spending. The action prevents the need to discuss it further. The decision must receive a majority vote in both houses of Congress before being finalized. The actual bill has been posted here. Every new bill must be voted on individually before the budget is raised.The postponement of further discussion—if it passes—enables Congress to pay its bills on time and not have to default. The BBC reports that spending in all areas, except the military, remains the same, but will rise by 1 percent in 2025. Military spending will increase by 3 percent this year, bringing it to $886 billion.
If Default Occurs
If there is no agreement and some payment is missed, a default has occurred. A possible solution would be to create a payment prioritization. It means that Congress would decide which bills get paid and which ones do not. NPR says that it would be nearly politically impossible at this time.The United States has never defaulted on payments partly because the nation is the basis for the world’s economy. The world trusts America’s ability to pay, which is why they so quickly buy U.S. Treasury bonds and believe that the United States will be able to pay the interest when it is due.
Welfare Programs
There was discussion about several welfare programs during the federal debt-ceiling talks. Although they discussed two Medicaid programs—the Temporary Assistance for Needy Families (TANF) and the Supplemental Nutrition Assistance Program (SNAP)—the amount of support was unchanged. The one change that did occur was to SNAP, which raised the age and work requirements from 50 to 54. The exceptions to this requirement are veterans and the homeless.The Potential Result of Defaulting on US Loans
There is little doubt that if America defaulted on its loans, there would be serious trouble. There would be a worldwide impact. Since it has never happened before, the exact results are uncertain.The first thing that would happen would be that many programs would go uncovered. It would result in a reduction in spending on programs such as Social Security and Medicare. The military would suffer a reduction in pay and its budget reduced. The average 30-year mortgage would be increased by about $130,000.
The CFR reports that a default would likely cause the loss of about three million jobs. CNN reported that some states and Washington, D.C., would be hit the hardest in terms of job losses. Those states would include those with large federal institutions, military bases, and labs—particularly Alaska, Hawaii, and New Mexico.
Foreign Currencies Depend on American Solvency
Because the U.S. dollar is currently the world’s reserve currency, a drop in its value—because of a lack of confidence in it—would likely cause many other countries’ monetary systems to lose value as well. More than half of the monetary reserves of foreign countries are held in Treasury bonds. The resulting shockwave would be felt worldwide.A shortfall of money could be raised by a large increase in taxes. This move would be highly unpopular in Congress and with Americans.
Whatever is going to happen with the vote on the debt ceiling, it will happen very soon. Keep an eye on the news to determine whether or not the vote could affect you.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
