Debt Ceiling 2023: Two Congressmen Say They Have a ‘Fail-Safe Option’ if Negotiations Falter — Here’s What it Could Mean for You
The debt-to-gross domestic product (GDP) ratio is a formula used to calculate a nation’s sovereign debt compared to its annual economic output, and is one important measurement of a country’s overall economic health. When the debt-to-GDP ratio is considered healthy it helps the well-being of the economy — investors invest more, companies hire more, and consumers spend more. A nation’s “debt ceiling,” or how much the country is able to borrow, is one factor that impacts the debt-to-GDP ratio.
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The Current U.S. Debt-to-GDP Ratio
The United States currently has a debt-to-GDP ratio that is hovering around 123% as of Dec. 2022, per CEIC data. This means that the country’s annual economic output is currently eclipsed by its total sovereign debt. When this happens, there is a risk that the country could default on its debts — or that the economy could enter a recession.
Potential Solutions to the Debt Ceiling Crisis
The White House suggests that Congress raise the nation’s debt ceiling in order to avoid default. President Biden and Speaker of the House Kevin McCarthy are meeting to determine next steps. In the meantime, Reps. Brian Fitzpatrick (R-Pa.) and Josh Gottheimer (D-N.J.) have begun work on a bipartisan backup solution, according The Hill.
“We’re going to let them [Biden and McCarthy] do their work,” Fitzpatrick told anchor Jake Tapper on CNN’s “State of the Union.” “We don’t want to undermine anybody. But what Josh and our group do together is, we don’t negotiate in public. We work everything out. We have a fail-safe option in the backdrop that will be ready to go to make sure that we get this job done.”
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Why the Debt Ceiling Issue Matters to Investors
There are a few concerns about the current ratio — and the debt ceiling crisis which could make the ratio swing either way: devaluation of currency, less competitiveness within the global economy, and the possibility of the United States defaulting on its loans. None of this has happened as yet, but remains a looming concern. Raising the debt ceiling means more borrowing — at least partially due to cover obligations, and partially in the interest of spurring spending via stimulus.
While one might think this necessarily leads to a higher GDP-to-debt ratio, proponents often argue that stimulus spending or similar may stave off economic recession, giving American consumers more opportunity to participate in the economy, driving up (and generally bolstering) GDP.
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