Published: 25th May, 2023
Context
As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending. The legislative curb on this borrowing is known as the debt ceiling.
What is the debt ceiling?
- The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as social security, Medicare and the military.
- The deficit left at the end of the year is tacked on to the country’s total debt.
- Congress is in charge of setting the debt limit, which currently stands at $31.4tn.
- The ceiling has been raised 78 times since 1960, under both Democrat and Republican presidents.
- At times, the ceiling was briefly suspended and then reinstated at a higher limit, a retroactive raising of the debt ceiling.
What happens if the US defaults?
- The US has never defaulted on its payments before, so what will happen is unclear.
- Investors would lose faith in the US dollar, job cuts would be imminent, and the US federal government would not have the means to continue all its services.
- Mortgage rates would likely soar, tanking the housing market.
Effect of US default on world
- It would send the United States crashing into recession, America's economy would hardly sink alone.
- The repercussions of a first-ever default on the federal debt would quickly reverberate around the world.
- Orders for Chinese factories that sell electronics to the United States could dry up.
- Swiss investors who own US Treasury would suffer losses.
- Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.
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