The US Has Hit its Debt Ceiling. Will It Upend its Economy, Global Markets | Explained

US Treasury Secretary Janet Yellen said on Thursday that she and her department are taking measures to prevent default on government debt as the US hits its debt limit.

The US debt ceiling is $31.4 trillion and the US touched that mark on Thursday. Yellen said she would take extraordinary measures to prevent America from defaulting.

But, what is the debt ceiling and how does it affect the US and global economy?

according to a report by cnbcThe debt limit is the amount the US Treasury Department is allowed to borrow to pay its bills. The Treasury Department pays Social Security and Medicare benefits, tax refunds, military pay, and interest on the outstanding national debt with money borrowed. cnbc Explained.

Now that the US has hit the debt limit, it cannot increase its debt limit and it becomes difficult to make these gains as well as pay the interest on the national debt.

Why is the debt ceiling an issue?

The debt ceiling is an issue because the revenue of the US economy i.e. tax income is more than the cost of running the country. According to the U.S. cnbc It has not run an annual surplus since 2001 and has borrowed to run the government, the report cited data from the White House Council of Economic Advisers.

There is another issue – default. There are fears that the US may default and run out of funds to meet its financial obligations on time. The report underlined that if the US defaults on its debt obligations, it could fail to pay investors who have bought US Treasury bonds issued by the Treasury Department.

according to website InvestopediaJapan, China, the UK, Ireland and Luxembourg are the top five foreign nations that are the largest foreign holders of US debt.

Has the loan limit been increased before?

Yes, the debt ceiling has been raised at least 78 times since 1960 by both Democrat and Republican administrations. It was extended thrice in the last six months. On December 16, 2021, the Treasury Department saw the largest dollar amount increase of the national debt as it raised the debt limit by $2.5 trillion to $31.4 trillion.

Has the US defaulted on its debt obligations before?

Yes, in 1979, but it happened because of a technical glitch in the bookkeeping system. It was fixed immediately.

What happens if the US defaults now?

There will be big consequences. The effect will hardly be noticeable now. Yellen said new investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefit Fund would be suspended until June to free up cash. It could also spend revenue that is due to come in as tax season begins next week and pays Social Security benefits, pays defense contractors and other federal workers.

But it is till June. If the debt ceiling is not raised by then, there will be an economic disaster, as happened in 2011, when the US was under the Obama administration.

A similar tug-of-war broke out between Republicans and Democrats over spending. Republicans, who currently control the House, have been pushing the Biden administration to reduce government spending, which they say has grown extraordinarily. In 2011, former US President Barack Obama and his administration faced a similar challenge.

In 2011, the credit rating agency S&P downgraded the US credit rating for the first time in history during the struggle in the US Congress. It also leads to a government shutdown. In 2013, Republicans staged a 16-day shutdown in an attempt to take advantage of the debt ceiling to undermine the Affordable Care Act (ACA).

Weeks after Republicans elected Kevin McCarthy as House speaker, they are now making a similar demand. Their demands are simple – reduce expenditure and we will think about increasing the loan limit.

If they do not do so, liabilities such as social security, payments to defense contractors, salaries of military and government employees will go unpaid. There will be upheaval in the stock markets around the world. a report by BBC Said weather forecasts could also be affected.

US debt is heavily traded and seen as low risk, with a default causing ‘irreparable damage’ to that image. The public will suffer as interest rates for mortgages, credit card debt and other loans will go up. The US dollar will also weaken.

“Failure to meet the government’s obligations will cause irreparable damage to the US economy, the livelihoods of all Americans and global financial stability,” Yellen said last week. BBC,

On Thursday, Yellen urged Republicans to consider raising the debt ceiling once again.

In a letter to the congressional leadership, Treasury Secretary Janet Yellen said, “I respectfully urge Congress to act immediately to protect the full faith and credit of America.” AFP, Yellen again warned of “considerable uncertainty” regarding the impact of the measures.

The warning from JPMorgan Chase CEO Jamie Dimon was too harsh. “We should never question the credibility of the United States government. It is sacred cnbc,

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