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The stock market crashes. The elderly are forced to go back to work to pay
their bills. And the world loses faith in the U.S. economy. These are all very
real things that might happen now the United States government has hit the debt ceiling.
On January 19, 2023, the Treasury took “extraordinary measures” to
make sure that the U.S. government can continue to meet its financial
obligations. The Treasury Department can only move so much cash around before the
reserves are depleted, so it’s a race against time for Congress to increase
the debt ceiling. The Treasury Department can only move so much cash around before the reserves are
depleted. And while these extraordinary measures are being implemented, the U.S.
government is putting retirement funds, social security, and aid to local governments at risk.
Yet, this conundrum seems to happen every few years. In 2021 the United States government
scrambled to raise the debt ceiling from its previous level, which was adjusted only a few
years before. In fact, since the end of World War II, the U.S. has raised or modified the debt
ceiling over 100 times. Why does the U.S. keep needing to raise the debt limit? What will happen
if the debt limit is reached? And is there any way to fix this seemingly never-ending problem?
First, let’s explain exactly what the debt ceiling, also known as the debt limit, is.
The debt limit is the amount of money the United States government
is allowed to borrow in order to pay its already existing financial obligations.
The government borrows money by selling securities such as Treasury bonds, bills,
and notes. What the debt ceiling legally does is prevent the government from selling any more of
these things beyond a certain limit. So, how much debt can the U.S. government currently
incur before it begins to default on its payments? The number is absolutely staggering.
The current debt ceiling for the United States government is just under 31.4
trillion dollars. This means that it can sell government securities to buyers and
investors up to that amount. However, once the government has sold $31.4 trillion,
it can no longer issue any new bonds or securities. And unfortunately,
this is just not enough money to pay all of its existing financial obligations,
which is why the debt ceiling needs to be raised. Once the debt limit is raised, the government
can once again sell securities to increase the amount of cash it has on hand to pay its bills.
You might be wondering what existing obligations could cost the government so
much money. The answer is almost everything that keeps the U.S. and its citizens going.
These include programs like Social Security and Medicare, military salaries, tax refunds,
and interest that is incurred on the securities that the government has sold in the past. There
is an important distinction that needs to be made about the debt ceiling. Even when the debt limit
is raised, it does not allow the government to spend more money. The debt ceiling is put
in place only to make sure the United States can borrow money to pay off existing debts.
Therefore, if the government wants to increase spending in certain sectors,
such as infrastructure or its military, raising the debt ceiling will not allow them to do
this. For example, if the U.S. military wants to purchase a brand new tank to add to its arsenal,
raising the debt ceiling will not allow them to do this. The only way that the government
can increase new spending is through an increase in the federal budget. And it is
here that another important distinction lies. Defaulting on existing bills as a
result of not increasing the debt ceiling is very different from a government shutdown.
A shutdown occurs when Congress fails to pass a budget that allows government agencies to
spend new money. When this happens, workers legally can’t be paid by the government,
all projects that require a constant flow of cash are ceased, and everyone has to wait until a new
budget is passed until spending can recommence. Of course, essential personnel and infrastructure
are allowed to keep operating, but everything deemed non-essential comes to a grinding halt.
Eventually, Congress will inevitably pass a new budget after a lot of moaning and
groaning from both sides, and the government can resume its daily operations. However, if
the government starts to default on its financial obligations due to reaching the debt ceiling,
many more people and institutions will suffer as a result. This is because the debt ceiling
doesn’t just cover the costs of running the government itself; it also is used to pay
bills and interest to its own citizens, private businesses, and financial institutions. Basically,
if the United States defaults on its financial obligations as a result of
reaching the debt ceiling, pretty much everyone will suffer, not just government employees.
We will go into more detail about the horrible things that will happen if the debt limit is
reached in a bit. But first, let’s examine why the debt ceiling needs to be consistently raised.
During the 1980s, the U.S. debt limit was increased from 1 trillion dollars to almost
3 trillion dollars. Then, things started to get really out of hand. In the 90s,
the debt ceiling was increased to 6 trillion dollars. By 2011 it had
grown to 16.39 trillion dollars, and in 2021 when the last increase occurred,
the ceiling reached 31.381 trillion dollars. This is the number that the United States is
rapidly approaching with all of its existing bills. It is also worth noting that sometimes
the government does not increase the debt limit but suspends it all together. This
has happened seven times since 2013 to keep the U.S. government from defaulting on its payments.
There are many reasons why the Federal Government keeps owing more and more
money each year. A large factor is the annual budget deficits that the government incurs,
meaning that it spends more than it brings in via taxes and investments. However,
since U.S. citizens are living longer than ever, along with more and more people retiring each day
and collecting social security, the obligations of the government have continued to increase.
This is not a surprise. When the debt ceiling is raised, it is not done so that the government can
pay what it owes at that moment in time; it is done so that the government can continue
to pay its bills for a few years or until the debt ceiling needs to be re-assessed. This is why many
financial analysts believe the debt ceiling should be eliminated. The way that the U.S. government
currently operates is based on borrowing and lending to make ends meet. Economists know that
if the United States defaults on its financial obligations, it will be catastrophic. Therefore,
they suggest that removing the debt limit would reduce the stress on the markets, financial
institutions, and citizens whenever the government approaches the debt ceiling like they are today.
When the government does reach the debt ceiling, it takes what is known
as “extraordinary measures” to ensure that it can continue to pay its bills. Unfortunately,
these measures can only last for so long, and if they are abused,
they can cause real harm to millions of people in the United States and around the world.
On January 19, when the debt limit was reached, the Treasury Department had to immediately
implement extraordinary measures to make sure the government can keep paying its bills. These
maneuvers consisted of things like prematurely redeeming Treasury bonds from the retirement
accounts of federal employees. That’s right; the government sometimes needs to tamper with its
own employees' retirement funds to make sure it can continue to pay its bills. So far, they have
replaced what they’ve taken with interest, but what if they couldn’t? Hypothetically,
if Congress refused to raise the debt ceiling, the bonds taken out of retirement accounts would
not be returned. This is a nightmare scenario for anyone employed by the Federal Government.
This also brings up another reason why the debt ceiling
needs to be constantly raised. Every time extraordinary measures are taken,
the government needs to replace what they borrow with interest. Therefore, they are
increasing the debt they owe even more, and as a result, the debt ceiling continues to rise.
The Treasury Department may also halt their contributions to government pension funds or
suspend state government series securities. All of these things should be avoided at all costs,
but they are a necessary evil to keep the government from defaulting on its
other financial responsibilities. Right now, the Treasury Department is looking
to fund the payment of its bills by pulling money from places like the
Civil Service Retirement and Disability Fund, the Postal Service Retiree Health
Benefits Fund, and the Federal Employees Retirement System Thrift Savings Plan.
Extraordinary measures are never a fix to the debt problem; they are a band-aid that can only
last so long. That is why the debt ceiling needs to be increased. Although, if the government could
find a way to generate more money than it lends and owes, it could theoretically result in the
lowering of the debt ceiling. But as things stand right now, there is no way for the government to
do this. It owes too much, and the division of parties will never allow for a slashed
budget or tax rate that could adequately fund the government and pay for all its bills. The
United States may be the only superpower in the world, but its government is an absolute mess.
This brings us to what would happen if the debt ceiling was reached,
the extraordinary measures were exhausted, and the United States had to default on its bills.
This is a worst-case scenario for everyone involved. If this happens, the government will
quickly run out of cash. The millions of daily obligations that it has will go unpaid. Citizens
will not receive their Social Security payments, federal employees won’t be paid their salaries,
and military personnel, as well as veterans, will lose their benefits. The government’s
power will literally be turned off, as it won’t even be able to pay its electric bills.
The government will still have money coming in through various financial programs;
the problem is that it just won’t be enough to pay each one of its 80 million bills each month.
This means that the U.S. government will have to prioritize which bills to pay and which to
default on. Most plans call for the government to continue paying servicing debts to bondholders,
but many financial analysts have criticized this strategy as a poor way to handle the situation.
Defaulting on government bills is not just a problem for the Fed;
it is a problem for the entire economy. The U.S. dollar is seen as relatively stable,
while investors around the world consider government bonds and securities as being a
safe bet. This is because the United States has never defaulted on its payments before.
The U.S. economy would almost instantly tank, resulting in a global economic catastrophe.
Interest rates would skyrocket, there would be a mass selloff of government securities,
and there would be no one to buy up the surplus as the government could no longer be trusted to
pay them back. This would create a snowball effect leading to less and
less money being pumped into the government, resulting in even more bills going unpaid.
As the value of Treasuries plummeted, financial institutions that owned a large amount of these
securities would lose enormous amounts of money. Interest rates on car loans,
home mortgages, and credit cards would grow to unsustainable levels. It is
almost a guarantee that the U.S. economy would go into recession,
and if the debt ceiling was not eventually raised, a depression would soon follow.
Economists suspect that if the United States government refused to increase the debt limit and
defaulted on its bills, its GDP would decline by around 4%, 6 million jobs would be lost,
and unemployment would rise to around 9%. There would also be a cumulative 15 trillion dollars
in household losses, and the stock market would dip to one-third of its current value. The U.S.
government defaulting on its payments would hurt every aspect of the American economy.
And even if the government managed to raise the debt ceiling soon after the initial default,
it would still be too late. Most economists agree that all of the negative effects caused
by the U.S. government not paying its bills would last for years after it was in good
standing again. This is why people begin to worry as soon as the U.S. approaches
the debt ceiling. It is highly unlikely that Congress will refuse to raise the debt limit
in the coming months due to the long-lasting ramifications, but crazier things have happened.
Recently, Goldman Sachs has warned the government in no uncertain terms that the
game they’re playing is incredibly dangerous. The longer they wait to raise the debt ceiling,
the more nervous investors and average citizens become as they fear what could happen to their
investment and retirement portfolios. And with the U.S. economy currently in a recession,
any further uncertainty in the markets could be devastating.
This brings us to what needs to be done in order to prevent an economic collapse in the future.
First of all, Congress must raise the debt ceiling. It is not optional at this point.
Unfortunately, the only way to lower the amount of debt that the United States has needs to be done
proactively, and we are well beyond that point. Continuously raising the debt ceiling without
any real plan is not a good option either. The higher the debt ceiling is in the U.S.,
the more problems there will be in the future. The continuously rising debt
could stunt economic growth or even reduce investors' faith in the U.S. Treasury.
What this means is that when the government raises the debt ceiling, it also needs to have
a plan to address the runaway debt plaguing the institution. All economists agree that the U.S.
government should not default on its bills, but they also agree something more needs to be done.
If the U.S. government is serious about reducing its debt and eventually lowering the debt ceiling,
it needs to discuss ways to decrease spending long before it gets to the point
it’s at now. It would be beneficial if, when Congress votes on raising the debt ceiling,
they also discuss cost-cutting measures that can be taken in the future. These talks should
have no effect on the decision to raise the debt limit right now as it is too late, but
they should at least start a conversation around saving money during the next budgetary period.
Perhaps the government could start to reduce its future financial obligations
by decreasing the number of securities it sells. Or maybe taxes could be raised
slightly in order to generate more revenue to widdle away at the debt crisis. However,
none of these things matter if they are discussed after a budget is passed. These decisions need
to be made ahead of time if the government is serious about reducing the country’s future debt.
What it comes down to is the government needs to stop the cycle of incurring debt to pay its
current financial obligations. This will be a balancing act as securities are one
of the backbones of the U.S. economy. At the same time, there are very powerful
players who will do everything they can to make sure that taxes remain relatively low.
Unfortunately, there is no easy fix for the constant raising of the debt limit.
Right now, it is not clear how long the government can last by using extraordinary measures to pay
its bills. As the 2022 tax season is now over, further revenue should come in as people pay the
government what they owe. Although, the IRS also needs to return money to people who overpaid,
which means more bills will be due. Many analysts agree that the U.S. government still
has several months before it will be unable to meet its financial obligations. However,
the debt ceiling will have to be raised if we are to avoid an economic crisis.
The U.S. currently has a house divided with conservative Republicans wanting to
tie raising the debt limit to spending cuts in the next budget. On the other side of the aisle,
most Democrats oppose such reductions. It is a big mess,
but one that will need to be dealt with relatively soon if the U.S. government
wants to save the nation’s economy from plunging into chaos. Make no mistake,
the only way the United States will be able to pay its current bills is by raising the
debt ceiling in the coming months. Otherwise, it is going to be a rough time for everyone.
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Now watch “What If The US Economy CRASHES.” Or check out “Why 2023 Will Be The Worst Year EVER.”