Are We Headed for a National Financial Crisis?

Fortunately, our government came together to solve what could have been a catastrophic event for the U.S. economy. But, a few weeks ago, we weren’t so sure. With new articles being published on the Web by the hour, we did our own research on the debt ceiling crisis to shed some light on the situation.

What is the national debt?

The national debt, which currently stands at $31,462,154,854,902, is the amount of money the U.S. Federal government has borrowed to cover the outstanding balance of the country’s expenses incurred over time. When government spending exceeds revenue, the federal government borrows money to pay for the deficit. The national debt is the accumulation of the borrowing – in the form of Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities – plus the interest owed to the investors who purchased these securities.

What is the debt ceiling?

The debt ceiling is the amount of money the U.S. government is authorized to borrow to meet its existing legal obligations, like Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Only Congress can authorize the borrowing of money on the credit of the United States. From the founding of the U.S. until 1917, Congress authorized each debt issued. Created in 1917 to provide more flexibility to finance the U.S.’s involvement in World War I, Congress established a ceiling on the total amount of new bonds that could be issued. This legislative cap has to be raised by a majority vote in both the Senate and the House of Representatives. Congress has increased or suspended the debt limit 78 times since 1960. Now, Treasury Secretary Janet Yellen warns the country could run out of borrowing authority by June 1, 2023.

The federal government technically reached the debt ceiling – $31.4 trillion – in January, but the Treasury Department has implemented “extraordinary measures” to avoid default and keep payments flowing. While no one can pinpoint the exact date funds will run out, but experts expect the date to be sometime between early June and August. Regardless of the date, it is coming, along with the Treasury Department’s potential default.

If the debt ceiling is not raised and extraordinary measures run out, the U.S. government is legally unable to borrow money to pay its financial obligations. The government will be required to stop making payments unless the Treasury has cash on hand to cover them.

What happened in 2011?

The U.S. came dangerously close to defaulting in 2011. Republicans wanted deep spending cuts and caps on federal spending after the cuts were enacted. President Obama wanted Congress to raise the debt limit without restriction. Congress eventually reached a deal, but not before Standard & Poor’s downgraded the nation’s debt for the first time ever. Additionally, there was a drop in the stock market and an increase in borrowing costs.

What is the current debate?

Republicans want to cut government spending. They are refusing to raise the debt ceiling until President Biden and democrats agree to spending reductions. Republicans argue that the current debt is unsustainable and want 2024 spending to be less than it is today, with a spending cap for the next decade. They also want to include more stringent work requirements on recipients of government cash aid, food stamps, and the Medicare health care program.

However, President Biden and Senate democrats argue that any debate about government spending should be separate from a vote on raising the debt ceiling. That said, President Biden has proposed freezing spending at the current 2023 levels and is keeping the door open to discussions on work requirements.

What does the 14 Amendment have to do with it?

The 14th Amendment states that the “validity of the public debt of the United States authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” Experts argue that the clause makes default, and the debt ceiling, unconstitutional. According to the Congressional Progressive Caucus, “the debt ceiling conflicts with all the spending bills already passed by Congress.” In a letter to the President, they articulated that “not only does the debt ceiling run counter to the Constitution’s mandate that the validity of America’s public debt shall not be questioned, it contradicts the appropriations law that requires the Treasury to issue debt for the funding you are obligated to administer at Congress’s direction.”

The issue, however, is not clear. Moreover, even if President Biden invokes the 14th Amendment, there will be litigation around it, which will take time to resolve, more time than the government has to resolve the debt ceiling conundrum.   

What happens if the U.S. defaults?

The United States has never defaulted on its debts. A U.S. default could cause a huge ripple of negative consequences throughout the global financial system. It would cause the government to default on its legal obligations – an unprecedented event in American history. The Department of the Treasury website warns that failing to increase the debt limit could “threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.”  

U.S. government bonds are viewed as a safe investment because debts are always paid back on time. However, if the U.S. were to default and for the first time in history fail to pay back those debts the value of government bonds would depreciate and the global market would enter a tailspin.

Any hit to the country’s credit rating could do long-term harm to the value of U.S. treasuries and make the country a less appealing investment. By example, in 2013, when the government careened toward default before raising the debt limit at the last minute, the economy lost 1% of its GDP.

The Waiting Game

All eyes are on the negotiations. As the deadline for resolution approaches, the stakes – and our anxiety levels – get higher. All we can do now is wait and hope default is avoided during this national financial crisis.


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