Looking Up: Why the Debt Ceiling Debate Matters to You
The clock is ticking for Congress to take action and avoid a debt ceiling crisis. Read on below to find out how this can affect everyday Americans like you and me:
Debt Crisis Need-To-Know’s
The debt ceiling is the total amount of money the US government can borrow to meet its legal obligations, including funding for Social Security, Medicare, military salaries, interest on the national debt, and tax refunds. It was last increased to $31.4 trillion on Dec. 16, 2021.
The debt ceiling "x-date" is the date when the federal government will no longer be able to pay its bills and could default In this context, default refers to the inability of the government to fully repay its debts by the due date. A potential outcome of this situation is that lenders may opt to minimize their losses by shutting down the US government's account due to missed payments. This would kick off a financial crisis.
To avoid the United States from defaulting, the Department of the Treasury is utilizing "extraordinary measures," namely:
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Redeeming current and ceasing any new investments of retirement funds for government employees (including the CSRDF and Postal Fund)
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Suspending reinvestment in the G Fund
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Halting the issuance of SLGS Treasury securities
The “Limit, Save, Grow, Act”, which proposes to raise the debt limit by $1.5 trillion or through the end of March 2024, was also introduced. And, the “Problem Solvers Group,” a bipartisan caucus comprised of members of Congress, also proposed a bipartisan plan, including suspending the debt ceiling temporarily and creating an external fiscal commission.
These measures were put in place on May 1st.
In Case of a Debt Crisis, What Now?
How does all of this affect everyday Americans like you and me?
A default could trigger a financial crisis for the US and global economies, causing a worldwide recession, frozen credit markets, plunging stock markets and mass worldwide layoffs. The US has only defaulted once, in 1979, but a full-blown default as a result of Congress failing to raise the debt limit would have severe consequences, with U.S. debt losing its credit rating and causing a spike in interest rates.
Here are more concrete examples of how this can manifest:
A sell-off of U.S. debt
A U.S. government default could trigger a sell-off of U.S. Treasuries, considered among the safest securities, causing significant repercussions.
Money market funds could sell out
Money market funds are low-risk mutual funds that invest in short-term, high-credit quality debt like U.S. Treasury bills. They shield against volatility and are used by conservative investors. In the past, they were sold off when the U.S. neared the debt ceiling limits, as they are sensitive to changes in interest rates, and yields on shorter-term T-bills increased.
Federal benefits would be suspended
If a default occurs, vital federal programs would be halted or delayed. These include Social Security, Medicare, Medicaid, housing assistance, Supplemental Nutrition Assistance Program (SNAP) benefits, and veteran support.
Stock markets would roil
Default would lead to a downgrade of US credit rating, causing markets to collapse as it did in 2011. This was warned by the White House’s Council of Economic Advisors in 2021. If debt ceiling talks persist, markets will become more unstable.
Interest rates would increase
Debt ceiling negotiations may increase rates on credit cards and variable rate student loans, as credit lenders tighten their standards. Rates may also increase on auto loans, federal/private student loans, and personal loans, depending on the timing and duration of a default's impact.
Tax refunds could be delayed
Failure to raise the debt ceiling could result in delayed tax refunds for Americans who file their taxes on time. Currently, tax filers usually receive their refunds within 21 days of filing. If a default occurs, those who file their taxes late may not receive their refunds at all.
Housing rates would increase
A debt ceiling crisis won't affect those with fixed-rate mortgages or HELOCs. ARM holders, on the other hand, may face higher rates, with a potential increase of more than four percentage points on rate indexes since spring 2022. A default would likely lead to higher rates on new mortgages as well. Meanwhile, the direction of variable-rate HELOCs is unclear.
Keep Your Savings Close and Your Budget Tighter
The US Government’s default could lead to suspended federal benefits, a collapse in the stock market, delayed tax refunds, and increased interest rates for housing and more.
At this time, it’s best to ease on spending and save for a rainy day.
Another helpful course of action is getting in contact with your local representative to let them know which side you stand on in the Debt Ceiling Debate.
In conclusion, the US government's looming debt ceiling crisis has the potential to cause a catastrophic financial disaster both nationally and globally.
While the Treasury Department is currently employing extraordinary measures to avoid a default, Congress must take swift action to raise or suspend the debt limit. If they fail to do so, it could trigger a worldwide recession, frozen credit markets, and a spike in interest rates, resulting in delayed federal benefits, delayed tax refunds, and increased rates on credit cards, student loans, and mortgages.
It's crucial that policymakers work together to avoid such an outcome and ensure the stability of the US economy.
