The U.S. Debt Ceiling

On Thursday, January 19, the United States hit its debt ceiling, which is currently at $31.4 trillion  as of 2021. The debt ceiling is the legalized amount of money the U.S. is allowed to have in debt. The U.S. government needs to either temporarily or permanently raise the debt limit, suspend it, or suffer the consequences. 

National Consequences

If the U.S. doesn’t implement measures to work around the current debt ceiling, it could default. A default would negatively impact the economy by increasing interest rates. Investors would demand higher interest rates on future investments due to the U.S.’s past inability to pay them back. Higher interest rates make borrowing money harder and debt more expensive. The stock market would suffer and creditors would be less likely to desire U.S. investments. 

If the U.S. defaults, it will also be unable to pay out federal money to various social programs. Money can no longer be paid towards Social Security and Medicare benefits, national debt interest, tax refunds, military salaries and many other important payments. The federal government will be unable to financially support organizations that millions of citizens depend on. Many rely on health coverage and affordable health care, which will be put at risk. The government will be unable to carry out its obligations to aid in childcare, cash assistance, and help finance small businesses. The U.S. will lose its capability to fund services, from national parks to national defense. 

Global Economic Consequences

If the U.S. defaults, other countries would suffer, too.  In many ways, default could negatively impact the global economy. 

Firstly, if the U.S. enters a recession, the amount of goods they purchase from other countries would lessen. This would impact global trade in virtually every country as other countries would not be able to sell as many goods to the U.S. Additionally, some emerging countries rely on the U.S., so this would impact them to an even greater extent. Emerging countries make a majority of their income from exports to the US. If trade slows, their income would decrease. This would cause many financial issues for these countries, including increased unemployment and poverty. 

Another problem on the horizon could be a change in the value of a dollar. The U.S. dollar is a credible currency that other countries have adopted as their official currency. If the value of the U.S. dollar lessens, emerging countries will no longer have a credible currency. 

Other problems that could arise may include negatively affected business contracts, the U.S. could lose investors and other countries may steer away from using U.S. currency. Globally, many transactions that take place across borders are required to use the US dollar. This is put in place to make sure no sudden change in a local currency would affect the transaction. Yet, if there were to be a decline in the value of a dollar, anyone expecting payments would receive less than anticipated for their goods and services.  

Plans to Avoid Default

President Biden has made it clear that raising the debt ceiling is non-negotiable, in order to avoid a recession. The Republican majority in the House of Representatives have made it clear that the U.S. government has been spending irresponsibly, and spending must be cut down. Any hesitation to make a decision may result in immediate consequences. The U.S. needs to suspend or increase the debt limit to avoid huge harm towards the US and global economy. House Speaker Kevin McCarthy met with Biden on February 1 to discuss how to avoid default. McCarthy proposed cutting expenses instead of raising the debt budget, reducing the “runaway spending”. However, President Biden had his mind set on raising the debt ceiling, which has been routine throughout history. After the meeting, Biden and McCarthy said they had a “good” meeting but came to no agreements. They plan to meet again soon to discuss the right approach to raising the debt limit. It seems their views aligned in some areas, as McCarthy said “I believe you have to lift the debt ceiling, but you do not lift the debt ceiling without changing your behavior. So it’s got to be both.” Biden went on to say, “It doesn’t mean we’re going to agree ... But let’s treat each other with respect.”

2011

As mentioned previously, the U.S. routinely increases the debt ceiling limit. In 2011, the U.S. was faced with this exact problem. Under President Barack Obama, Republicans and Democrats were split on deciding whether to raise the debt ceiling, and the U.S. nearly defaulted. Former President Obama and former Vice President Biden vowed to never come that close to defaulting again. President Biden is strict in his words that the U.S. needs to raise the debt ceiling to avoid economic catastrophe.