A year of financial stress lies ahead as the US government tries to grapple with the default on debt ceiling
The US Government crossed the debt ceiling limit, triggering a financial crisis for citizens of the country
The United States has reached its debt ceiling. The country’s $31.4 trillion statutory debt limit has been crossed. This limit essentially pertains to the amount of money that the US government’s Treasury Department can borrow by the authorisation of the US Congress. This money then goes to the payment of social security bills, healthcare benefits, tax refunds, military salaries and also the interest payments on outstanding national debt. Touching the ceiling on the maximum amount of debt that the administration can incur would mean that they are running out of measures to pay these necessary bills and this in turn affects every American citizen for the time to come. Not only bill payments but this would also mean that the treasury department would likely default on the US Treasury bond that investors purchase.
As soon as the US administration hit the debt ceiling, the Treasury Department came up with the announcement of executing some ‘extraordinary measures’ to keep tabs on the pending bills, other necessary payments and prevent default. This essentially just means moving the funds around so as to cover the cost of the important payments. The government can no longer borrow to cover the long standing debts. However, it has been estimated that by June of this year, the government would have exhausted all the other options for debt payment and this could have repercussions for the US economy and essentially the global economic system.
What could be done?
Given that this is not a situation the United States has faced for the very first time, there are measures in place as per the precedents set in the previous years. To put this into context, the US Treasury Department has come close to or touched the debt ceiling cap about 80 times since 1960. Each time discussions regarding the ceiling caps have cropped up, there has been an increase in the limit of the debt ceiling. It was in the previous year however, that the administration saw the largest amount of increase in the limit from $2.5 trillion to a whopping $31.4 trillion.
It is very worrying that even after the increase of the statutory debt limit to as high as $31.4 trillion, there is such a crisis at hand. This further adds to the problems of the common citizens, the investors and consequently the stock market that has already dipped significantly since the news broke out.
As per the ‘extraordinary measures’ by the Treasury Department, in a letter to the Congress, the US Secretary of the Treasury Janet Yellen declared that the investments in the Civil Service Retirement and Disability Fund as well as the Postal Service Retiree Health Benefits Fund would be curtailed for a few months. The government would also look to divert the tax revenues towards payment of essential social security bills, defence and federal employees.
These measures would still not stand out post June and so the one stable solution that remains is if the US Congress consents to either suspend the debt or raise the debt ceiling limit. It has been done in the past and it is likely to be done in the future. This could however also create a vicious cycle of raising debt ceiling each time the government runs the risk of defaulting on payments. This is precisely why this time there is a contention on whether the US Congress would allow an increase in the debt ceiling limit.
The trend of crossing the debt ceiling has run across party lines with not just one particular party to blame. However, the reality of the US political climate suggests that this debate would easily turn political instead of financial.
One could not forget the fact that the two houses of the US Congress are polarised between the Republicans, who are in majority in the House of Representatives and the Democrats who have the majority in the Senate. The Republicans at this point are of the view that instead of demanding another raise in the debt ceiling, the government should act over policies on reducing the government spending and allocating the financial resources responsibly. It may not be as easy as it sounds. The House of Representatives speaker Kevin McCarthy has been particularly wary of deciding in favour of raising any debt limits without deliberation.
A worrisome trend
The debt ceiling limits were put in place by the Congress to ensure the control over government spending. Even though the ceiling has been raised in the past, it is not a measure of the higher government spending capacity but rather of poor financial regulation. The taxpayers would likely bear the brunt of the crisis as major payments get halted, including income tax returns.
The risks of defaults are larger than ever and the US administration would be answerable to crossing the limit of debt as high as $31.4 trillion in just a matter of months. If the trend of compounding government spending is not curbed, a severe economic crisis could ensue.
All $= USD
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