Unless Congress raises the debt limit by Nov. 3, the U.S. Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills. Mandel Ngan/AFP/Getty Images hide caption
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Mandel Ngan/AFP/Getty Images
Unless Congress raises the debt limit by Nov. 3, the U.S. Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills.
Mandel Ngan/AFP/Getty Images
Most likely, Congress will — as it always does — find a last-minute way to dodge a debt-ceiling crisis.
It's easy to get bored with it all. Scores of times over recent decades, lawmakers have taken the country to the brink of financial catastrophe only to swerve away by voting to allow more debt.
Now here we are again. Treasury says it will run out of money to pay bills — in full and on time — as early as Nov. 3. That means Congress will wait until the last minute, vote — and we can all go back to ignoring this weird debt drama until the next time. Right?
Well, what if this year, the House is too cranky and distracted to pull off another late save? Remember that the Republican-led chamber is in the midst of a leadership change, with a vote for House speaker set for Thursday, Oct. 29 — mighty close to Nov. 3.
And don't forget that several senators are running for their party's presidential nomination. They may want to make lengthy debt-related speeches on the Senate floor — a time-consuming process that might push votes past Nov. 3.
It's All Politics
Treasury Secretary Keeps Up Pressure To Raise Debt Limit
So what if, amid these political stresses, Congress actually blows the deadline and the country runs out of money? What does that even mean?
This may help you understand what's happening:
- Debt Ceiling: The term used to describe the limit Congress sets on how much money government may borrow. The current cap is $18.113 trillion.
- Hitting The Ceiling: Unless Congress raises the cap by Nov. 3, Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills.
- Fixing The Problem: Congress can raise the ceiling, or suspend it or eliminate it entirely.
- Why This Is Happening: The White House and Democrats want to simply raise the ceiling, but many Republicans see the deadline as an opportunity to force deeper spending cuts and other reforms.
- Why It Matters: Having a reputation for always paying its debts allows the U.S. Treasury to borrow at very low interest rates. Investors everywhere count on the United States to be the one safe haven where they can park money and always get paid the principle and interest. It's not a stretch to say the global financial system is built around U.S. stability.
If the United States were to run out of cash, the injured parties would be too numerous to count. Here's a short list:
- Social Security and Medicare recipients: Treasury Secretary Jacob Lew told Congress the U.S. makes about 80 million payments a month, "including Social Security and veteran benefits, military salaries, Medicare reimbursem*nts and many others. In the absence of congressional action, Treasury would be unable to satisfy all of these obligations." Not getting a government check could mean going hungry for millions of Americans.
- Bondholders: If the Treasury were to run out of cash, it may not be able to pay public investors, including foreign governments. That default could trigger bond market chaos that sets off a global financial panic.
- Stockholders: Trouble in the bond market would spill over to stocks. Share prices took a huge hit in August 2011, when a bruising debt-ceiling battle led to a U.S. credit downgrade.
- Homebuyers and other borrowers: If Treasury were to default even briefly, the result could be a lower credit rating. A lower rating potentially could mean higher interest rates, and many consumer loans are pegged to Treasury rates.
- Taxpayers: If Treasury ends up having to pay higher interest rates, then maintaining the huge U.S. debt would become even more expensive for taxpayers.
As chairman of the House Ways and Means Committee, Rep. Paul Ryan, R-Wis., said last month that "if the United States missed a bond payment, it would shake the confidence of the world economy."
If the House speakership election goes as planned next week, Ryan would be in charge of rallying his troops behind a solution. But his path forward is not clear because Republicans disagree with each other about what to demand in exchange for approving a higher ceiling. They promise action next week.
Democrats sent a letter to Republicans Friday, begging for a "clean" bill to lift the cap. "Raising the debt ceiling will ensure that America pays its bills for expenses already incurred, and does not authorize any new spending," they wrote.
At a press conference Friday, Minority Leader Nancy Pelosi, D-Calif., said Republicans who want to address spending cuts should save their arguments for a separate debate over funding legislation needed to avert a government shutdown on Dec. 11.
"We stand ready to cooperate, to negotiate on the keeping-government-open legislation," Pelosi said.
While the arguments continue in Washington, on Wall Street, there is no debate. Economists and investors are urging Congress to act. Citi strategist Andrew Hollenhorst summed up the sentiment in his understated note to investors. A failure to solve the problem next week would be "highly imprudent," he wrote.
FAQs
The short-term effect of raising the debt ceiling to accommodate more federal spending and borrowing would be more inflation—a hidden tax which has been robbing Americans of thousands of dollars annually for the last two years. To continue on that path is not only fiscally irresponsible, but fundamentally immoral.
How worried should I be about the debt ceiling? ›
Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.
What happens if we reach the debt ceiling? ›
What happens if the debt ceiling is hit? Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue debt and soon after will run out of cash-on-hand.
What happens to social security if the debt ceiling isn't raised? ›
Under normal conditions, the Treasury sends Social Security payments one month in arrears. That means the check you receive in June covers your benefits for the month of May. If the debt ceiling isn't raised, the Social Security payments due to be sent to beneficiaries in June would most likely still go out.
What are the negatives of debt ceiling? ›
Disadvantages. Increasing the debt ceiling has an inverse effect on the country's reputation in the global markets. As such, it may lead to a downgrade of the credit rating of the U.S. while increasing the overall cost of its debt.
What happens to the dollar if the U.S. debt ceiling isn't raised? ›
The Fed economists estimated that such an impasse would lead to an 80 basis point increase in 10-year Treasury yields, a 30 percent decline in stock prices, a 10 percent drop in the value of the dollar, and a hit to household and business confidence, with these effects waning over a two-year period.
Who does the US owe money to? ›
The United States owes money to many countries, including Japan, mainland China, the U.K., Ireland, Luxembourg, Brazil, Switzerland and Belgium, among others.
Does debt ceiling cause government shutdown? ›
In contrast to government shutdowns, a failure to raise the debt ceiling threatens not only the spending subject to annual appropriation by Congress, but all federal spending—including interest on the debt and Social Security, Medicare, and other government benefits.
What does debt ceiling mean for Americans? ›
As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling.
Why is America in so much debt? ›
One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.
Tried and true basics. "We're advising people to prepare for a potential default as you would for an impending recession," says Anna Helhoski of NerdWallet. That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses.
When was the last time the debt ceiling was raised? ›
On December 16, 2021, less than a week before the beginning of BPC's X Date range, President Biden signed legislation that raised the debt limit by $2.5 trillion, to approximately $31.4 trillion.
What are the odds of the U.S. defaulting on debt? ›
The odds of the U.S. government missing its debt ceiling deadline have reached about 25% — and the chances are rising by the day, according to a new estimate by JPMorgan Chase experts.
What happens to a 401k if the debt ceiling isn't raised? ›
Impact on 401(k)s
If the government is unable to raise the debt ceiling, it may default on its debt obligations, which can lead to a loss of confidence in the U.S. economy. This, in turn, can cause the stock market to drop, leading to a decrease in the value of 401(k)s.
Will the government shutdown affect Social Security benefits? ›
Recipients will continue to receive their Social Security and SSI checks. The Social Security Administration (SSA) will provide limited services like issuing Social Security cards and holding appointments for benefit applications. However, SSA will stop services like benefit verifications and processing overpayments.
What is the problem with the U.S. debt? ›
The U.S. is among the most indebted countries in the world—and the problem is only getting worse. The federal government's debt is currently $33 trillion and annual deficits just reached the highest in U.S. history outside of the pandemic years (at nearly $2 trillion).
Has Congress ever failed to raise the debt ceiling? ›
Except for about a year during 1835–1836, the United States has continuously had a fluctuating public debt. The national debt has increased under every presidential administration since Herbert Hoover. The United States has raised its debt ceiling at least 90 times in the 20th century. It has never been reduced.
What happens to money market funds if the debt ceiling isn't raised? ›
As default concerns rise, investors fear money market funds may "break the buck," which happens when a fund's so-called net asset value, or total assets minus liabilities, falls below $1.
Does raising the debt ceiling increase inflation? ›
To the extent that total economic output declines and the income support is financed by a one-time increase in the national debt, the likely result is a one-time increase in the price level. “In other words, Americans should prepare themselves for a temporary burst of inflation,” Andolfatto wrote.
