Why Congress Needs To Raise The U.S. Federal Debt Ceiling NOW!

Why is it imperative that Congress take immediate action on the US Federal Debt Ceiling as soon as possible? According to an article by CNBC, lawmakers have until the end of this month to raise the debt limit once again. In fact, Treasury Secretary Janet Yellen said failing to act could spark an economic catastrophe. While the legal cap on how much the U.S. can borrow doesn’t impact what consumers can spend, if Congress can’t reach a deal on a new debt limit before October, it will place everything in gridlock, from government payments to the ability to borrow. Yellen goes on to state, “In a matter of days, millions of Americans could be strapped for cash".

Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays. So as you can see, the need to solve the issue of the federal borrowing limit has become one of the government’s primary points of concern. Now before I go much further, let’s define exactly what we mean by federal debt and the debt limit. The federal debt is the amount of money the government currently owes for spending on payments such as Social Security, Medicare, military salaries and tax refunds. The debt limit allows the government to finance those existing obligations. Yellen states that “Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars. Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance”.

Congress and the White House have changed the debt ceiling almost 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling increased to nearly $3 trillion from less than $1 trillion. During the 1990s, it doubled to nearly $6 trillion, and doubled again in the 2000s to over $12 trillion. In 2019, Congress voted to suspend the debt limit until July 31st, 2021. Now, the Treasury is using temporary “emergency measures” to buy more time so the government can keep paying its obligations to bondholders, veterans and Social Security recipients. But once the government exhausts those measures, it will no longer be able to issue debt and could run out of cash-on-hand.

Of course, the U.S. government has never actually defaulted on its debt and isn’t expected to this time, either. Yet, the threat of defaulting has come up many times, and comes with a wide array of consequences if it does happen to occur. Some economists had hoped Senate Democrats would include a debt ceiling increase as part of the $3.5 trillion spending plan. However, the budget resolution unfortunately left out the debt ceiling entirely. As a worst-case scenario, the federal government would default, at least temporarily, on some of its obligations, including those Social Security payments, veterans’ benefits and salaries for federal workers.

In addition, potential downgrades of U.S. credit ratings would negatively impact the treasury. In fact, demand for U.S. Treasury bonds could sink if they are no longer considered a reliable, safe-haven investment. As a result, bondholders could demand dramatically higher interest rates to compensate for the increased risk. That, in turn, would send other borrowing costs higher, including credit cards, car loans and mortgage rates, which are generally pegged to yields on U.S. Treasury notes. At the very least, fear of default could rattle the stock market and potentially send shock waves through the economy.

Back in 2011, a debt limit standoff in Congress brought the country very close to a default before lawmakers finally struck a deal, but not without a downgrade of the country’s credit rating and significant market volatility. And between July and October of that year, the S&P 500 sank more than 18%. Janet Yellen further bolsters this concern in a letter to House Speaker Nancy Pelosi earlier this month by remarking, “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States”.

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