Why is there a debt ceiling, what are the implications of a potential default and what happens now that the US government has hit its borrowing limit?
Congress and the White House have until at least early June to resolve the issue.
Raising the ceiling lets the government borrow to cover the gap between spending and taxes already approved by Congress.The limit was routinely raised without incident until 1953. That year, approval was held up in the Senate in an attempt to restrain president Dwight Eisenhower, who had requested an increase to enable the construction of the national highway system.
Consumer confidence plummeted as did poll ratings for Republicans in Congress and then-president Barack Obama, who agreed to more than US$2 trillion in spending cuts over a decade to end the crisis. Defaulting on debt would “needlessly plunge the country into economic chaos, collapse and catastrophe while giving our competitors like China a historic boost” said a spokesman for President Joe Biden.Failure to pay holders of US government bonds would make them less desirable as investments, forcing the government to pay more in interest to sell them. That would have cascading effects.
“The political squabbles in the coming weeks will likely lead to stock market volatility,” said Shane Sideris, co-founder of Synchronous Wealth Advisors in California. If the current fight is not resolved before the US misses payments on its obligations the market declines could be severe.If the debt ceiling is not raised, the US would be forced to drastically cut government spending.
Still, there is no guarantee that Treasuries would rally this time, especially with inflation running hot and the Federal Reserve raising interest rates, according to John Velis, a macro strategist at BNY Mellon. “Higher interest rates mean higher borrowing costs for cars, autos and even student loans. The combination of higher borrowing costs with higher inflation can put more strain on households and businesses.”
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