What is the debt ceiling?

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Congress heads for a summer battle over spending levels as Democrats rush to craft a pair of spending bills while simultaneously tackling the debt ceiling to keep the United States from defaulting on its financial obligations.

In 2019, former President Donald Trump suspended the country’s borrowing limit for two years, but that suspension is set to expire on July 31, and Democrats apparently do not yet have a plan to increase the limit or suspend it again.

“We are looking at all options,” House Speaker Nancy Pelosi recently told Bloomberg News.

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During her testimony to Congress, Treasury Secretary Janet Yellen urged lawmakers to tackle the looming debt ceiling, warning that failure to adhere to this rule could lead to a financial crisis that threatens jobs and savings of Americans still recovering from the coronavirus pandemic.

“A default on the national debt should be seen as unthinkable. Failure to raise the debt ceiling would have absolutely catastrophic economic consequences,” Yellen said. “It would be completely unprecedented in American history for the United States government to fail in its legal obligations. “

But what is the debt ceiling, which is often used as a political football – and how could it affect individual Americans if Congress does not raise the ceiling?

The debt ceiling, which is currently around $ 22 trillion, is the legal limit on the total amount of debt the federal government can accumulate; according to Committee for a Responsible Federal Budget, it applies to both the $ 16.2 trillion held by the public and the $ 5.9 trillion owed by the government.

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If Congress is unable to raise the debt ceiling, the Treasury would enter uncharted territory, unable to pay the bills – including payments to Social Security recipients, government employees, or the military – because he would not have money in hand. The Treasury Department would no longer be able to issue any more bills or bonds and would instead have to rely on tax revenue and emergency accounts to foot the bill.

As a result, the federal government would have to temporarily default on some of its obligations, which could have serious and negative economic consequences. Interest rates would likely rise and the demand for treasury bills would fall; even the threat of default can lead to increased borrowing costs.

The United States has never defaulted on its debt before, but came close in 2011, when House Republicans refused to raise the debt ceiling, prompting the rating agency Standard and Poor’s to downgrade the US debt rating by a notch.

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Many experts, however, believe that mass economic chaos due to the United States defaulting on its debt is unlikely. Congress raises the ceiling when it needs to; since the debt ceiling was created in 1917, Congress has raised it 110 times.

“Even if the extraordinary measures and Treasury liquidity were depleted, it still would not mean default,” Fisher Investments said in a recent RealClearMarkets editorial. “Default does not mean delaying payments to suppliers, social security or other supposed obligations. It is one thing and only one: not to pay interest or to repay the principal of the debt when due.”



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