Debt Ceiling: Is There a Looming Economic Crisis?

Republicans and Democrats in Washington D.C. are in a stand-off over raising the debt ceiling. Research from the Congressional Budget Office and the Department of the Treasury shows that the federal government is rapidly approaching the X-date, which is the day when the federal government runs out of money to pay its bills. This has created a debt ceiling crisis that is unprecedented in U.S. history.

The X-date could arrive as soon as June 1 if Congress doesn’t vote to raise the debt ceiling.

What Is the Debt Ceiling?

The debt ceiling is the limit on how much the United States can borrow to pay its bills. The government actually reached the debt limit in January 2023. Since then it has been using what is called “extraordinary measures,” which The New York Times described as “accounting tricks,” to pay its bills. By June 1, the U.S. will exhaust those measures and will have to default on at least some of their bills.

The debt ceiling currently sits at $31.4 trillion.

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Has the U.S. Ever Hit the Debt Ceiling?

The U.S. has never hit the debt ceiling and has always managed to pay its debts on time. During the Trump administration, Congress voted to raise the debt limit three times to avoid defaulting. The debt limit has been raised dozens of times in history.

What Happens If the Debt Ceiling Is Reached?

Since the debt limit has never been reached, it’s not entirely clear what will happen if we reach the X-date without a vote to raise the limit. Federal Reserve Chair, Jerome Powell, told the Senate Banking Committee that the consequences of failing to raise the debt ceiling could be “hard to estimate.” He said, “They could be extraordinarily adverse and could do longstanding harm.”

What Is the Debt Ceiling Crisis?

The debt ceiling crisis could have longstanding ramifications on the U.S. and worldwide economies. According to the Council of Economic Advisors, a breach of the debt ceiling would “likely lead to severe damage to the economy.” It would likely result in a recession, a loss of consumer and business confidence and a spike in unemployment rates.

It is likely that the debt ceiling crisis could also lead to wild fluctuations and a downswing in the stock market, along with other investments.

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Moody’s analysts predict that breaching the debt ceiling could lead to a drop in the U.S. Gross Domestic Product and a loss of nearly 2 million jobs. It could also result in higher interest costs. “If Treasury securities are no longer perceived as risk-free by global investors, future generations of Americans would pay a steep economic price,” according to Moody’s.

If the federal government has to prioritize which bills to pay, it could result in delays for Americans receiving Social Security and Medicare benefits, as well.

Final Take

As the X-date approaches, the U.S. must find a way to pay its bills. This could mean raising the debt ceiling or temporarily suspending the debt ceiling limit.

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