What you need to know about the debt ceiling as your deadline approaches (2023)

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People walk past the New York Stock Exchange in New York on March 22. The provocation in Washington regarding the raising of the US debt ceiling has begun to arouse concern in some financial markets.Petera Morgana/AP hide the inscription

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Petera Morgana/AP

People walk past the New York Stock Exchange in New York on March 22. The provocation in Washington regarding the raising of the US debt ceiling has begun to arouse concern in some financial markets.

Petera Morgana/AP

The federal government is perilously close to national default. It is up to Congress to vote to raise the country's debt ceiling, known as the debt ceiling. But House Speaker Kevin McCarthy, a Republican from California, is arguing with President Biden over Republican demands to tie the debt limit to spending limits and other political demands.

Treasury Secretary Janet Yellen warned that the country could run out of borrowing powers by June 1, leaving negotiators little time to reach a deal.

Biden met recentlywith McCarthy, House Democratic Leader Hakeem Jeffries, D-NY, Senate Majority Leader Chuck Schumer, D-NY, and Senate Minority Leader Mitch McConnell, R-Ky. to discuss the way forward. The group was unable to reach an agreement, but negotiations are ongoing at team level to avoid insolvency.

Here are nine questions you can ask about the debt ceiling and fighting over it.

What is the debt ceiling?

The "debt ceiling" or "debt limit" is the limit on debt that the federal government can accumulate. Congress is constitutionally required to authorize debt issuance. This allows the government to borrow to meet existing legal obligations, such as Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

"Before, whenever there was a Treasury auction where a loan was made, Congress would pass a new law just for that auction," said Jason Furman, a top economic adviser to former President Barack Obama and an economics professor at Harvard.

"In 1917, the United States had to borrow a lot of money for World War I," he said. "To streamline the process and make it easier, Congress has moved to a new system where they say you can borrow up to that amount of money and then come back to us and we'll raise it."

Congress increased or suspendeddebt limit 78 times since 1960the Treasury Department reported.

How do experts know when the government really ran out of funds?

Economists analyze how much the government should collect in taxes when those payments should go into Treasury bills, and plan debt repayments to determine a date, known as date X, when the debt authorization may expire.

However, the Treasury Department has access to some toolscalled emergency measuresto avoid the default. These measures include transferring investments and implementing accounting tools to transfer funds.

federal governmenttechnically reached its debt limit in Januaryand emergency measures have kept payments flowing ever since. Experts cannot pinpoint an exact date for funds to run out, but they can indicate a general range that is expected to drop at some point.early June, and possibly as late as July or August.

Why is this being fought over?

Debt was a generally unpopular concept in American politics.

Every vote a legislature casts is part of that person's political history, and many legislators don't want to be seen approving more federal loans or spending.

Lawmakers also like to assign odd priorities to bills that are perceived as binding legislation. This makes the debt limit one of the main targets of political struggles.

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House Speaker Kevin McCarthy of California (left) and Senate Majority Leader Chuck Schumer of New York (right) listen to President Biden ahead of the Oval Office meeting on the debt ceiling on May 9. Leader Hakeem Jeffries from New York was also present.Evan Vucci/AP hide the inscription

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Evan Vucci/AP

House Speaker Kevin McCarthy of California (left) and Senate Majority Leader Chuck Schumer of New York (right) listen to President Biden ahead of the Oval Office meeting on the debt ceiling on May 9. Leader Hakeem Jeffries from New York was also present.

Evan Vucci/AP

"Everybody use [steps up] debt ceiling for their favorite policy," said Maya MacGuineas, chair of the Committee on Responsible Federal Budgets. "The real problem is now people are actually talking about default."

In the past, voting to raise the debt ceiling was a relatively quiet and uncontroversial matter. That changed in 2011, when the country was dangerously close to bankruptcy.

Mark Zandi, an analyst at Moody's Analytics, said there have been political debt battles before, but none as dangerous or as consistent as the 2011 battle.

"It wasn't clear until the end that lawmakers would come up with a way to sign the dotted line and raise the limit," Zandi said. “I think at one point the stock market was down nearly 20% on the day. It's quite a big swoon for the market."

At the time, Republican Speaker of the House John Boehner of R-Ohio was at an impasse with Obama over spending. Republicans wanted deep spending cuts and limits on how much federal spending could increase after the cuts were implemented.

Obama insisted that Congress raise the debt ceiling without any redundant policies - known as clean growth.

Congress finally reached an agreement to raise the debt ceiling along with limits on future spending, but not before Standard & Poor's downgraded the country's debt rating for the first time.

Many economists say that today's situation is surprisingly similar to the political struggle of 2011 and there are serious fears that the country may default.

What can happen if it is not lifted?

The Treasury Department would not be able to make payments on time. Failure to make a payment of any kind or amount will be considered a default.

Some Republicans suggested a choice of debts to pay,a system called payment prioritization. Congress would have to pass a bill to make this possible, which is politically unlikely. Most experts say it may also be impracticable, and the idea is not currently being seriously considered as a solution.

Has the United States ever defaulted on these debts?

NO.

This is one of the reasons why the federal government can easily sell Treasury bonds to investors around the world, and the US dollar is one of the most trusted currencies.

"Treasury bonds are the most trusted debt instrument in the world, so much so that even if an economic crisis breaks out in the United States, people will come and buy Treasury bonds because they trust them," MacGuineas said. “They trust the US, they trust the fact that they will get paid if it is challenged because we actually started falling behind on payments and didn't pay the interest we owed. paper in the same capacity as before"

Would reducing or cutting spending now solve the problem?

No, the debt limit is related to money that has been spent as a result of laws already passed by Congress.

"As a mathematical consequence of the laws that Congress has already passed, you have to borrow a certain amount," Furman said. “This loan is not something that President Biden wants to do unilaterally to realize his favorite projects. It's about getting what Congress told him to get."

In fact, some of the accumulated debt is the result of laws passed by former presidents, including Donald Trump.

The spending limits and other changes contained in the bill passed by House Republicans are separate policies designed to address future debt buildup, not the current need to raise the debt ceiling.

What else can the default setting affect?

A US default could cause a huge wave of negative consequences throughout the global financial system. Any deterioration in a country's creditworthiness could do long-term damage to the value of US Treasuries and make the country a less attractive investment.

"I'm really worried that there's a real chance of default, and that's so dangerous and a sign that the United States is incapable of governing itself in a way that works," MacGuineas said. "We should all be concerned about the debt ceiling itself, but also what it says about our policies."

Zandi warned that the impacts could extend beyond investment and loan fees.

"Don't worry about your stock portfolio, worry about your job," he said. “Because many jobs will be lost. Unemployment will be much higher. Is the economy already struggling to avoid recession due to high inflation and high interest rates? It's definitely going to put pressure on us and, you know, layoffs. Stock portfolios will be the least of people's worries.

Furman said it could be worse than the 2008 financial crisis, when the collapse of Lehman Brothers Bank sparked a global financial crisis.

"It could be worse than at Lehman Brothers where everyone is basically asking for their money back because they don't believe in the guarantee anymore," Furman said. "And you have the equivalent of a rune on the global financial system."

Is default the same as closing?

NO. A government shutdown occurs when Congress fails to approve annual spending accounts before the end of the fiscal year on September 30.

The two issues sometimes come together as legislators have sometimes extended the debt limit to deliberately adjust it to the end of the tax year to force wider spending discussions along with debt authorization.

Are there any other ways to solve this problem besides just raising the debt limit?

Most experts agree that the current debt limiting process is not working. MacGuineas of the Committee on Responsible Federal Budgets said Congress should reassess debt and spending priorities, but the debt limit mechanism doesn't force them to make choices.

"The debt ceiling is a terrible way to impose fiscal responsibility," she said. "It does not make sense. He says that after you vote to borrow a lot of money, you will vote whether you should actually pay those bills. It's a stupid approach."

Instead, she proposed a system where Congress agrees to raise the debt limit when legislation is passed.

Other economists have suggested abolishing the debt ceiling altogether.

Other less popular proposals include minting a $1 trillion platinum coin to cover the debt or raising it so high that the next debate will stall for years or decades.