If U.S. debt ceiling isn't raised by deadline, what does default mean?
By: Jeff Stein (Washington Post)
The full faith and credit of the United States rests in Chuck Schumer's hands. Whatever happens depends to a very large extent on the choices Chuck Schumer makes.
The House has passed a bill addressing the debt limit and moved that bill to the Senate. Now it's up to the Senate to do something. Chuck Schumer can bring the House bill to the Senate floor for debate and modification. Chuck Schumer can bring alternative Senate bills to the floor for debate and a vote. Or Chuck Schumer can dawdle. Dawdling doesn't seem to be a responsible way to address the debt limit but that seems to be Schumer's choice.
A President cannot raise the debt limit; only Congress can raise the debt limit. The only thing Biden can do is threaten a veto which would place blame squarely on Biden's shoulders. No matter what Congress does or does not do to address the debt limit; Biden is solely responsible for avoiding a default on Federal bonds. That means only Biden has the direct authority to shut down the government to cover maturing bonds. Of course, Biden could declare a national emergency, suspend Congress, and do whatever he chooses to do with dictatorial powers. That would create a Constitutional crisis of greater magnitude than anything his predecessor attempted.
S E E D E D C O N T E N T
Federal workers furloughed. Social Security checks for seniors on hold. Soaring mortgage rates. A global financial system sent reeling.
Leaders from Congress and the White House are trying to forge an agreement to lift the federal debt ceiling, with only a few weeks before the Treasury Department may no longer be able to avert an unprecedented U.S. default. If they fail, and the government can't meet its payment obligations, economists and financial experts predict chaos.
"It would be a lethal combination," said Mark Zandi, chief economist at Moody's. "You can see how this thing could really metastasize and take down the entire financial system, which would ultimately take out the economy."
Treasury Secretary Janet L. Yellen has said the agency may only be able to sustain operations until June 1 before running out of money if the government can't borrow more. That specific deadline — known as the "X-date" — depends on tax revenue and spending, which can fluctuate dramatically from week to week.
What happens next is also hard to predict.
The cascading impacts of default would probably compound — a pause in federal payments would hurt the economy, which would hurt the stock market, which would in turn hurt the economy even more, and so on. The interactions between collapsing home values, rising interest rates and a destabilized global financial system are hard to calculate. Some estimates suggest that more than 8 million jobs could be wiped out. Mortgage rates might soar by more than 20 percent, according to some projections, and the economy would contract by as much as it did during the 2008 Great Recession.
But what economists stress above all else is the unpredictability — particularly if the breach lasts for weeks or months. Experts stress that the worst-case scenarios are unlikely if lawmakers only narrowly miss the deadline, perhaps by hours or even a few days, but that the risks rise dramatically should the standoff persist.
"We do not know: This has never happened," said Claudia Sahm, a liberal economist who worked at the Federal Reserve. "What makes me so concerned is I can't sketch out, and I don't think anyone can, is: What happens at X+1?"
Here are some outcomes that experts worry about most.
Stocks crash
Wall Street would probably be the first trouble spot.
So far, financial markets haven't swung much over the debt ceiling standoff. The price to hedge against a U.S. government default has risen, as has the cost of government bonds due around the debt ceiling deadline — reflecting doubt about repayment. But those tremors are not noticeable for most households.
That is expected to change the closer the government gets to a default. The shock of a missed payment would ripple across the financial system — stocks, bonds, mutual funds, derivatives — before spilling out into the broader economy, experts say.
Stocks would likely plummet on the expectation of a wider economic downturn, as interest rates rise and investors pull funds out of the market to preserve their access to short-term cash. A banking sector already wary of making new loans could tighten up further.
How the Washington establishment is confounding Biden's debt ceiling plan
The last time the U.S. government neared default, stocks took a bruising. In 2011, the X-date was less than a week away during a standoff between President Barack Obama and Republicans in Congress. Major indexes fell by roughly 20 percent.
Moody's Analytics has estimated that stock prices could fall by roughly one-fifth, wiping out $10 trillion in household wealth and devastating the retirement accounts of millions of Americans. The White House has estimated that the decline could be closer to 45 percent.
The $46 trillion bond market would also tremble, as the values of existing Treasury bonds collapse due to higher yields on new ones. And businesses would likely halt expansion — driving stocks down even more.
A sudden recession
If the standoff persists, the impact would quickly spread from financial markets to the broader economy.
A drop in household wealth across the country, caused by a sell-off on Wall Street, would reduce consumer spending, which would hurt businesses, too.
When is the debt limit deadline? Early June, CBO says. Unless it's not.
And a spike in interest rates would make it harder to get a loan or start a small business. That could also crash the already cooling housing market. A recent report from Zillow projected that a default would drive mortgage rates above 8 percent and push housing sales down by a startling 23 percent. The construction industry and other sectors would feel the pain, too.
The most drastic impact might be a pause in regular federal payments to tens of millions of American families, including seniors on Medicare and Social Security and people relying on food stamps. The federal government is projected to spend roughly $6 trillion this year, which translates into roughly $16 billion per day. Not all of that goes directly to households, of course, but it's a huge amount of money to vanish from the economy overnight.
Debt ceiling breach could wipe out 8 million jobs, White House warns
A 2013 report by the Treasury Department found the 2011 debt ceiling standoff caused a $2.4 trillion decline in total household wealth. The broader economy, the White House Council of Economic Advisers said, could contract by as much as 6 percent, similar to the 2008 Great Recession.
Federal workers in limbo
The U.S. government has a process for shutting down when Congress fails to approve a new budget: Agencies whose spending hasn't been approved prepare workers for furloughs, instructing certain "essential" staff that they will keep working without pay. There have been three shutdowns that lasted at least a full day over the past decade. Workers are all typically repaid afterward.
But hitting the debt ceiling might look nothing like that, experts say. The White House Office of Management and Budget has not yet disseminated instructions for a debt-related shutdown, which some budget analysts say would be difficult because there is no way of knowing which payments the government won't be able to make. That could change as the deadline nears, but as of now, there is no playbook for keeping even essential federal employees on the job.
Invoking the 14th Amendment to dodge the debt limit is risky, Biden aides fear
The uncertainty could affect U.S. military personnel as well as food safety inspectors, air traffic controllers and workers in other vital jobs. The federal government is the largest employer in the country, with roughly 4.2 million full-time employees, according to the Congressional Research Service. The National Association of Government Employees, which represents nearly 75,000 federal workers, sued to challenge the constitutionality of the debt limit earlier this month, citing its potential impact on federal workers.
Social Security and Medicare miss payments
More than 60 million people receive monthly Social Security payments, mostly seniors. A similar number depend on Medicare for their health insurance.
Some Republicans have claimed that the federal government can continue making these payments even without borrowing by redirecting incoming tax revenue. But budget experts are skeptical the Treasury Department will have the ability to send seniors these benefits on time, particularly if the breach lasts for weeks or months.
If the government can still make some payments with incoming tax revenue, the administration might have to pick between sending checks to seniors and making interest payments on the debt. But forgoing those interest payments to keep Social Security and Medicare functioning could exacerbate what would likely be an already severe financial crisis in that doomsday scenario.
U.S. borrowing costs soar
The federal government is able to borrow money relatively cheaply because it's seen as a very safe credit risk — no one, in normal circumstances, expects that it might miss any payments.
The safety of U.S. government bonds has made them an essential building block in the world financial system. Serving as reserves for everything from foreign nations' central banks to money market funds, U.S. Treasurys are widely recognized as one of the most secure and liquid investments available, backed by the full faith and credit of the U.S. government. Any financial instrument whose value is based on Treasury bonds could be thrown out of whack after a debt ceiling breach, with a sharp drop in prices leading to volatility and uncertainty worldwide.
Economists say the discount the United States has enjoyed for decades on borrowing could end. One estimate by the Brookings Institution, a D.C.-based think tank, found that breaching the debt limit could increase federal borrowing costs by $750 billion over the next decade.
Economic problems spread worldwide
Many nations safeguard their finances by buying large amounts of U.S. government debt, widely regarded as one of the safest assets in the world. But breaching the debt ceiling could drive the value of those bonds down, hurting reserves for many nations.
Economists fear that would dramatically increase the ranks of the countries drowning in debt, like Sri Lanka and Pakistan, with a potential rise in protests and global geopolitical instability. The Federal Reserve's push to raise interest rates over the past year to curb inflation has already eroded the value of U.S. bond holdings for many nations. And according to the Council on Foreign Relations, more than half of the world's foreign currency reserves are held in U.S. dollars — roughly three times as much as any other currency.
The dollar drops, along with U.S. prestige
A default could hurt U.S. standing on the world stage, experts say, by revealing the depth of the country's internal political dysfunction.
Already, financial experts have been following some early signs that the world economy is beginning to shed its dependence on the dollar, with countries such as Brazil and Malaysia calling for nations to trade more frequently in other currencies. Roughly 60 percent of foreign currency exchanges still happen in dollars, but a default on U.S. debt — which could send the value of the greenback reeling — could change that.
As Yellen, in Japan on Thursday, said to reporters about a default: "It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests."
Something more fundamental may also be at stake. Governments' credibility is tied in part to their ability to respond to a crisis. A debt ceiling breach would cast doubt on the federal government's capacity not only to respond to an emergency, but also to fulfill one of its most elementary functions — paying the bills. If the United States can't do that, citizens and leaders in other countries might wonder, what else can't it manage anymore?
"It would erode global confidence in our political system, because part of our standing in the world is based on international confidence that our political system is basically functional," said Daniel Bergstresser, associate professor of finance at Brandeis University's International Business School. "And this would show it isn't."
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Without an agreement on raising the debt limit, Federal spending would be drastically cut. Schumer dawdling on Senate action to address the debt limit gives budget hawks exactly what they want. The budget hawks are going to win no matter what Chuck Schumer chooses to do. Chuck Schumer can play political games to give Democrats an edge in the next election. But even if Democrats sweep the 2024 elections, they'll preside over a much smaller government.
Sounds like an Escher take on relativity.
Doesn't sound like Schumer is the one playing games, it is the republicans that are refusing to do their jobs and raise the debt limit.
How many time did SEN Biden vote to raise the debt ceiling 2001-2008?
Too many times Biden voted against raising the debt limit.
My, how times have changed once HE got into office!
Are you ignoring the fact that REPUBLICANS in the House have done EXACTLY what you claim they haven't? The House passed a bill raising the limit. Dispute the truth at your own peril.
You aren't entitled to just make up facts.
The Republican controlled House has enacted a bill to raise the debt limit. Republicans have fulfilled their Constitutional obligation and responsibility.
Now it's up to Chuck Schumer to do something. The debt limit cannot be raised until the Democrat controlled Senate addresses the debt limit. Democrats sitting on their hands to create a panic crisis won't shield them from the fallout.
Even if Democrats succeed in shifting blame onto Republicans to gain an advantage in the 2024 election, the Democrats will preside over a smaller government. Democrats won't be able to claim that deficits don't matter. And Democrats won't be able to expand government spending without ringing alarm bells.
With conditions that would hurt every day Americans and reward the very wealthy. Again....
The start of negotiating positions.
Here is a link, which one benefits the wealthy, please be specific, and how it accomplishes it.
What’s in the House GOP Debt Limit Bill - The New York Times (nytimes.com)
Then the Senate needs to fulfill its Constitutional obligations and responsibilities to address those issues. Simply trying to beat Republicans into submission won't avoid the requirement that the Senate address the debt limit.
The Senate doesn't have the luxury of sitting on the sidelines. Congress must pass legislation to raise the debt limit and that requires agreement between the Senate and the House.
You've been listening to Karine too much.
The Republicans did their jobs and produced a bill. Now it's time for the Senate Democrats to do their jobs to approve it or provide one of their own. Any default falls on the Dems this time around.
House Republicans’ debt-ceiling-and-cuts bill would decimate funding that states, localities, tribal nations, and U.S. Territories rely on to provide vital services like schools, transit, and aid to families in crisis.
The bill would impose up to $1.3 trillion in state program cuts over ten years, which would leave states and localities with significantly less revenue, leading to an array of problems like more crowded classrooms, deteriorating water facilities, less affordable child care, and millions of people losing access to housing, substance use treatment, and food.
Even worse, the bill also cuts separate funding that states and localities use to provide health care and food assistance, severely limits states’ flexibility in how they provide cash assistance to families in poverty, and cuts states’ revenue by effectively giving it away to tax cheats.
And, in yet another hit to states’ residents and budgets, the House Republican bill would enable tax cheaters to get away with not paying roughly $191 billion over ten years in federal taxes that they owe by rescinding billions in additional funding the IRS received to rebuild its diminished enforcement capabilities.
Republicans are using the debt limit bill to try to roll back several Biden administration actions on student loans, including the ongoing loan repayment pause and a sweeping plan to provide widespread forgiveness.
A large chunk of the bill consists of energy proposals, including the entirety of the GOP’s signature energy package, the H.R.1 Lower Energy Costs Act.
That includes proposals aimed at boosting oil and gas production and mining, cutting down on the time it takes to greenlight energy projects.
Among the tax policies included in the Democrats’ Inflation Reduction Act that Republicans target are tax credits for electric vehicles, as well as for solar and wind infrastructure.
Republicans are seeking to repeal most of the tax breaks that Democrats passed in party-line votes last year as they sought to boost the production and consumption of clean energy.
The debt limit package includes legislation the House passed earlier this year that aims to increase domestic production of oil, natural gas and coal, and to ease permitting restrictions that delay pipelines, refineries and other projects.
Known as HR 1 to signify its importance to House Republicans, the energy bill also seeks to boost production of critical minerals such as lithium, nickel and cobalt that are used in electric vehicles, computers, cellphones and other products. Biden has described the House GOP’s legislation as a “thinly veiled license to pollute.”
Republicans passed a bill. Time for Little Chuckie to get to work.
So there is absolutely nothing there that benefits the rich, so you comment is a lie, thanks for proving me right.
You just screwed up a MAJOR go to with your "nothing for the rich" damnit. Now what are they going to harp on?
That abject ignorance of the left never cease to amaze me. Out of one side of there mouth they say it benefits the rich and then they say things like this.
Don't tax breaks benefit the rich more than the poor? seems this would hurt the rich.
And they whine incessantly about paying the debt we inccured and than post this kind of hypocrisy.
So are demorats for paying their debts? or only when it is convenient for political purposes?
We know that's misinformation because Democrats focus money onto cities and not onto states. Democrats political agenda is only directed toward blue island cities. That's how Democrats campaign. That's where Democrats seek political donors. That's the Democrats' party platform.
Democrats do not know or care about out-state issues and concerns. Yes, those cities are located in states. But that's just a politically expedient dodge. The Republicans' proposed cuts will impact large cities the most. Democrats are only trying to protect their ability to use tax payer money to buy votes in those cities. Democrats have been using the Federal budget as a campaign chest.
I bet those tax breaks for the rich that the republicans are trying to remove hurts their little talking point hearts.
I seem to remember Democrats fighting for tax cuts for the wealthy in their states.
I know it was a lengthy post filled with big words, and I am sorry that you were unwilling to read it. But if you ever do get around to reading it, you will see where the the wealthy are benefitted.
Another lying comment, try again, no where in that post do the rich benefit
Apparently many Democrats didn't think it benefitted wealthy Americans enough as they fought for more tax breaks for rich folks in blue states!