What is the debt ceiling?

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Politicians in Congress are currently facing the debt ceiling. Lawmakers are soon to reach an agreement to allow the government to meet its payment obligations for social security, tax credits and military salaries, among others.

Treasury Secretary Janet Yellen has warned that the Treasury will likely not have the means to pay its bills at some point in October.

Democrats want to suspend or increase the debt ceiling through legislation. However, Senate Minority Leader Mitch McConnell, R-Ky., Said Democrats must find a way to pass it without any GOP support.

Democrats argue that raising the cap will simply allow the U.S. Treasury to pay for the spending and tax cuts that were approved under the Trump administration, while Republicans say they won’t help raise the cap. debt because of the Democrats’ $ 3.5 billion spending plan. The suspension or increase of the limit does not authorize any new expenditure.

The Republican opposition could force Democrats to raise the cap themselves as part of the spending package, which they plan to push through without the GOP through budget reconciliation. The process only requires a simple majority in the Senate divided 50-50 per party.

So what does all of this mean to you? Here’s what the debt ceiling is and how its failure to raise it could have a huge impact on the economy.

What is the debt ceiling?

Simply put, the debt ceiling is the maximum amount that the US Treasury can borrow in the form of bond sales. This money is used to pay off a large number of financial obligations each month, including Social Security payments, Medicare reimbursements, and other programs such as tax reimbursements.

Without Congressional permission to continue taking on debt – which is necessary because the government spends more money than it collects through taxes – the Treasury cannot continue to fund its obligations.

The debt ceiling has risen steadily since its introduction in 1917, and since 1960 the debt ceiling has somehow been raised or suspended 78 times under the presidents of both parties, according to the Council of Treasure. website.

It is currently suspended and the Congressional Budget Office estimated in July that it should be increased from $ 22 trillion to $ 28.5 trillion. The Treasury also said that not raising the ceiling, and therefore allowing the government to default on its debts, “would have catastrophic economic consequences.”

“[The debt ceiling] is a century-old attempt to curb federal spending, “Bankrate analyst Mark Hamrick told CNBC Make It.”[Raising the ceiling] is a necessary step to enable the Treasury to effectively engage in spending that has already been approved by two branches of government. “

What if the government defaults?

If the government does not suspend or increase the debt limit, the Treasury will be unable to raise the cash needed to pay its obligations. The United States has never defaulted on its debt before. Yellen said she was “confident” the issue would be addressed in a recent Wall Street Journal opinion piece.

However, Yellen wrote that failing to do so would likely create “a historic financial crisis” that would result in “billions of dollars in growth and millions of jobs lost.”

Other experts agree that the default would have far-reaching effects throughout the economy.

“It would be very disruptive for the banking system, for the financial system,” said Andrew Mies, founder and chief investment officer of the wealth management company. 6 meridian. This is in part because banks are large owners of treasury securities, he adds.

In a fact sheet Released earlier this month, the White House warned that failure to raise the debt ceiling would lead to higher unemployment “and the labor market could lose millions of jobs.”

When the country came close to defaulting on its debt in 2011, the S&P 500 fell more than 18%. But it’s not just the markets – other operations that depend on government funding would also slow down or shut down altogether. Child tax credit payments could stop being sent, along with other services such as food stamps and social security.

“All the venues that people use for public performances and concerts would be closed,” Mies said. “If you waited to get a passport it would slow down. Any processing of any federal document would be slowed down.”

Beyond affected government operations, companies providing government services would suddenly see those cash flows dry up, Hamrick says.

“The federal government is essentially a big customer in the economy at large,” he says. “If the federal government stops paying for certain things, it means there will be all kinds of businesses that are suddenly facing a cash crunch and the risk of bankruptcy. “

This business failure, in turn, can result in lost earnings for American workers. And depending on how long government spending is suspended, it could cause problems for millions of jobs.

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