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

People pass the front of the New York Stock Exchange in New York, on March 22. Brinkmanship in Washington over raising the U.S. debt ceiling has begun to raise worries in parts of the financial markets. Peter Morgan/AP hide caption

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What you need to know about the debt ceiling as the deadline looms (2)

People pass the front of the New York Stock Exchange in New York, on March 22. Brinkmanship in Washington over raising the U.S. debt ceiling has begun to raise worries in parts of the financial markets.

Peter Morgan/AP

The federal government is perilously close to being unable to make payments on the country's debt. It is up to Congress to vote to increase the nation's borrowing cap, known as the debt limit. But House Speaker Kevin McCarthy, R-Calif., is in a standoff with President Biden over Republican demands to tie the debt limit to spending caps and other policy demands.

Treasury Secretary Janet Yellen has warned that the country could run out of borrowing authority by June 1, leaving negotiators little time to reach an agreement.

Biden recently met with McCarthy, House Democratic Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, R-Ky., to discuss a path forward. The group failed to reach a deal, but staff level talks are ongoing in an effort to avoid default.

Here are nine questions you may be asking about the debt ceiling and the fight over it.

(Video) Biden, McCarthy meet on debt ceiling as deadline looms

What is the debt ceiling?

The "debt ceiling" or "debt limit" is a cap on how much debt the federal government is allowed to accumulate. Congress is constitutionally required to authorize the issuance of debt. Doing so then allows the government borrow to meet its existing legal obligations like Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments.

"It used to be that every time you did a Treasury auction where you borrowed, Congress would pass a new law just for that one auction," said Jason Furman, a top economic adviser to former President Barack Obama and an economics professor at Harvard.

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    What you need to know about the debt ceiling as the deadline looms (3)

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"In 1917, the United States needed to borrow a lot of money for World War I," he said. "So in order to simplify that process and make it easier, Congress shifted to a new system where they said, you can borrow up to this amount of money and then come back to us and we'll raise it."

Congress has increased or suspended the debt limit 78 times since 1960, according to the Treasury Department.

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

Economists look at how much the government is expected to bring in through tax payments, when those payments are expected to arrive in Treasury accounts and scheduled debt payments to determine a timeframe, known as an X-Date for when the debt authority might run out.

(Video) Debt ceiling: Where negotiations stand as default deadline looms

However, the Treasury Department has access to a few tools, known as extraordinary measures, to avoid default. Those measures include moving investments and deploying accounting tools to shift funds around.

The federal government technically hit the debt limit in January and extraordinary measures have kept payments flowing since then. Experts cannot pinpoint the exact date when funds will run out but they can identify a general range which is expected to fall sometime in early June or possibly as late as July or August.

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Why is there a fight over it?

Debt has generally been an unpopular concept in American politics.

Every vote a lawmaker casts is part of that person's political record and many lawmakers do not want to be seen as signing off on more federal borrowing or spending.

Lawmakers also like to tack extraneous priorities onto bills that are seen as must-pass legislation. That makes the debt limit a prime target for political fights.

Speaker of the House Kevin McCarthy of Calif., left, and Senate Majority Leader Chuck Schumer of N.Y., right, listen as President Biden before an Oval Office meeting on the debt limit on May 9. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended. Evan Vucci/AP hide caption

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What you need to know about the debt ceiling as the deadline looms (6)
(Video) Biden and McCarthy meet as debt ceiling deadline looms

Speaker of the House Kevin McCarthy of Calif., left, and Senate Majority Leader Chuck Schumer of N.Y., right, listen as President Biden before an Oval Office meeting on the debt limit on May 9. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended.

Evan Vucci/AP

"Everybody uses [bills to increase] the debt ceiling for their favorite policies," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget. "The real problem here is that you now have people actually talking about defaulting."

In the past, votes to increase the debt limit were relatively quiet, non-controversial affairs. That changed in 2011 when the country came dangerously close to default.

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

"It wasn't clear up until the very end that lawmakers were going to figure out a way to sign on the dotted line and increase the limit," Zandi said. "The stock market at one point I think was down intraday almost 20%. That's a pretty large market swoon."

At the time, Republican House Speaker John Boehner, R-Ohio, was in a standoff with Obama over spending. Republicans wanted deep spending cuts and caps on how much federal spending could grow after the cuts were enacted.

Obama insisted Congress raise the debt limit without any extraneous policies --known as a clean increase.

Congress eventually reached a deal to increase the debt limit along with caps on future spending but not before the credit rating agency Standard & Poor's downgraded the nation's debt for the first time ever.

Many economists say the situation today is strikingly similar to the political fight in 2011 and there are serious concerns that the country could default.

What could happen if it's not raised?

The Treasury Department would be unable to make payments when they are due. Missing a payment of any kind or size would be considered a default.

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Some Republicans have suggested choosing which debts to pay, a system called payment prioritization. Congress would have to pass a law to make that possible, which is politically very unlikely. Most experts say it might also be impossible to execute from a practical standpoint and the idea is not being seriously considered as a solution at this time.

Has the U.S. ever failed to make these debt payments?

No.

And that is part of why the federal government is able to easily sell share Treasury bonds to investors across the globe and why the U.S. dollar is one of the most trusted currencies.

(Video) Biden, McCarthy to continue debt ceiling talks as deadline looms

"Treasuries are the debt vehicle that are most trusted in the entire world to the point where even if there is an economic crisis that originated in the U.S., people come and buy treasuries because they trust them," MacGuineas said. "They trust the U.S. they trust the fact that they will get paid if that is called into question, because we actually do start to default and we don't pay the interest that is due. We will never be able to regain that most trusted role in the same capacity we had before"

Would capping or cutting spending now resolve the problem?

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

"As a mathematical consequence of the laws Congress already passed, you have to borrow a certain amount," Furman said. "This borrowing isn't some unilateral thing that President Biden wants to do in order to do his favorite projects. It is in order to accomplish what Congress told him to accomplish."

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

Spending caps and other changes included in a bill passed by House Republicans are separate policies intended to address future debt accumulation, not the current need to increase the debt limit.

What else could be affected by a default?

A U.S. default could cause a huge ripple of negative consequences throughout the global financial system. Any hit to the country's credit rating could do long-term harm to the value of U.S. treasuries and make the country a less appealing investment.

"I am truly concerned there is an actual chance of default and that is so dangerous and such a sign that the U.S. is not able to govern itself in a way that is functioning," MacGuineas said. "We should all be worried both about the debt ceiling itself, but also about what it says about our politics."

Zandi warned that the consequences could go beyond just investment and lending rates.

"Don't worry about your stock portfolio, worry about your job," he said. "Because a lot of jobs are going to be lost. Unemployment is going to be a lot higher. Is the economy struggling already trying to avoid recession because of high inflation, high interest rates? This will certainly push us and, you know, it's going to be about layoffs. Stock portfolios will be the least of people's worries."

Furman said it could be worse than the 2008 financial crisis when the fall of Lehman Brothers Bank triggered a global financial crisis.

"It could be worse than Lehman Brothers, where everyone basically demands their money back because they don't believe the collateral anymore," Furman said. "And you have the equivalent of a run on the global financial system."

Is default the same thing as a shutdown?

No. A government shutdown occurs when Congress fails to authorize annual spending bills before the end of the fiscal year on Sept. 30.

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The two issues sometimes become linked because lawmakers have occasionally extended the debt limit to intentionally align with the end of the fiscal year in order to force broader spending discussions alongside the debt authorization.

Are there other ways this problem could be fixed, aside from just increasing the debt limit?

Most experts agree the current debt limit process isn't working. MacGuineas of the Committee for a Responsible Federal Budget said Congress should be reassessing debt and spending priorities but the debt limit mechanism does not actually force them to make choices.

"The debt ceiling is a terrible way to try to impose fiscal responsibility," she said. "It doesn't make sense. It says after you vote to borrow a lot of money then you will then vote whether to actually make good on those bills. That's a dumb approach."

Instead, she suggested a system where Congress agrees to increase the debt limit when they pass legislation.

(Video) Biden, McCarthy negotiate debt ceiling as deadline looms

Others economists have suggested abolishing the debt limit entirely.

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 be stalled for years or decades.

FAQs

What is the deadline to raise the debt ceiling? ›

Treasury Secretary Janet Yellen reaffirmed June 1 as the “hard deadline” for the US to raise the debt ceiling or risk defaulting on its obligations.

What happens if the U.S. raises the debt ceiling? ›

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the U.S. financial market and tip the economy into recession.

What is the best explanation of the debt ceiling? ›

In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury, thus limiting how much money the federal government may pay by borrowing more money, on the debt it already borrowed.

What happens if the U.S. goes into default? ›

A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.

Who does the US owe money to? ›

Which countries hold the most US debt? Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

Can the US government default on its debt? ›

Once the government exhausts its extraordinary measures and runs out of cash, it would be unable to issue new debt and pay its bills. The government could wind up defaulting on its debt if it is unable to make required payments to its bondholders.

What happens to the government if the debt ceiling isn t raised? ›

If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.

What happens if the US pays off all its debt? ›

If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world. "It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration. The U.S. borrows money by selling bonds.

What happens if we don't raise the debt ceiling? ›

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history.

What is the debt ceiling for dummies? ›

The debt ceiling, legally known as the debt limit, is the total amount of money that the U.S. government is authorized to borrow to pay existing obligations, such as Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and disbursements for other programs.

Where does the US borrow money from? ›

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.

What is the current US debt ceiling? ›

The $31.4 trillion debt ceiling has become a perennial subject of political impasses in recent years, as Republicans seek to limit government spending by slashing social welfare programmes, a prospect many Democrats balk at.

Will the stock market crash if the US defaults on its debt? ›

A US debt default could spark a 45% crash in the stock market and generate a deep recession akin to the 2008 Great Financial Crisis, the White House's Council of Economic Advisers warned earlier this month.

What country has no debt? ›

The 20 countries with the lowest national debt in 2022 in relation to gross domestic product (GDP)
CharacteristicNational debt in relation to GDP
Macao SAR0%
Brunei Darussalam2.06%
Kuwait2.92%
Hong Kong SAR4.26%
9 more rows
May 11, 2023

Does China have more debt than the US? ›

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

How much U.S. debt does China own? ›

Foreign holders of United States treasury debt

Of the total 7.4 trillion held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 859.4 billion U.S. dollars in U.S. securities.

Has the US ever been debt free? ›

Payment of US national debt

On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.

What does the 14th Amendment say about debt ceiling? ›

Fourteenth Amendment Equal Protection and Other Rights

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

How do I prepare for debt default? ›

Here's how you can prepare for a potential debt default.
  1. Military families should keep extra cash.
  2. Expect volatility in bonds.
  3. Stick with high-quality investments.
  4. Make necessary adjustments to your 401(k)
  5. Don't over invest, despite temptation.
  6. Prepare for Social Security delays.
22 hours ago

Why is US debt so high? ›

America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...

How much debt is the US in 2023? ›

Maintaining the National Debt

As of April 2023 it costs $460 billion to maintain the debt, which is 13% of the total federal spending. The national debt has increased every year over the past ten years.

Why can't the US make money to pay off debt? ›

The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.

When has us not been in debt? ›

However, President Andrew Jackson shrank that debt to zero in 1835. It was the only time in U.S. history when the country was free of debt.

How much credit card debt does the average American household have? ›

2022 American Household Credit Card Debt Study
Type of debtTotal owed by an average U.S. household with this debtTotal owed in the U.S.
Credit cards (revolving)$7,876$488.66 billion
Mortgages$228,640$12.04 trillion
Auto loans$29,107$1.56 trillion
Student loans$59,461$1.6 trillion
3 more rows
Jan 10, 2023

What is the safest place for money if the government defaults? ›

Treasurys have been seen as some of the safest investments worldwide. They are held by companies and countries the world over and used as collateral in all kinds of financial transactions. If the federal government failed to pay bondholders, it would have unimaginable consequences for the standing of the U.S.

What happens if the government shuts down? ›

When there is a government shutdown, federal agencies are required to classify their employees as either “essential” or “non-essential.” The employees classified as “essential” continue to work during the shutdown. However, the employees classified as “non-essential” are put on unpaid furlough.

How does the debt ceiling affect Social Security benefits? ›

As debt ceiling negotiations continue, some officials are warning Social Security checks may be affected. Benefit checks may be delayed, which would cause financial hardship for individuals and families who rely on that money. Still, some policy experts say it is unlikely the standoff would come to that point.

Why do they want to raise the debt ceiling? ›

Congress must act soon to increase the debt limit so that the United States can continue borrowing the funds needed to run the government and fulfill the budgetary obligations incurred by prior Congresses and presidential administrations.

What is the difference between a government shutdown and a debt ceiling? ›

In contrast to government shutdowns, a failure to raise the debt ceiling threatens not only the spending subject to annual appropriation by Congress, but all federal spending—including interest on the debt and Social Security, Medicare, and other government benefits.

Who holds the most US debt? ›

Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.

Which country has most debt? ›

Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.

Why does the US owe China? ›

The US owes so much money to China because of the large trade and investment deficit the US currently has with China. This deficit is the result of a combination of factors, including rising wages and technology costs in the US, slow growth in the US economy, and US policies that favor the import of goods from China.

Is the U.S. debt going up? ›

Federal debt held by the public is projected to rise from 98 percent of GDP in 2023 to 118 percent in 2033—an average increase of 2 percentage points per year. Over that period, the growth of interest costs and mandatory spending outpaces the growth of revenues and the economy, driving up debt.

What is a default in debt? ›

Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security. Individuals, businesses, and even countries can default on their debt obligations.

Who keeps the money when a stock goes down? ›

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.

Can you owe money if a stock crashes? ›

The price of a stock can fall to zero, but you would never lose more than you invested. Although losing your entire investment is painful, your obligation ends there. You will not owe money if a stock declines in value.

Will the stock market recover if it crashes? ›

It can be tempting to sell all of your investments when the stock market crashes. But this is usually a mistake. Remember that the market will eventually recover, and selling now will only lock in your losses.

What is the best explanation of the debt ceiling quizlet? ›

The legal limit set by Congress on the total amount that the U.S. Treasury can borrow. If the level of federal debt hits the debt ceiling, the government cannot legally borrow additional funds until Congress raises the debt ceiling.

What does the 14th Amendment have to do with the debt ceiling? ›

Fourteenth Amendment Equal Protection and Other Rights

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Which statement is most accurate the debt ceiling? ›

Which statement is most accurate? Answers: A. The debt ceiling is a requirement that new spending proposals or tax cuts must be offset by reductions elsewhere.

Can debt collectors take your Social Security benefits? ›

407, 652(b), 659 and 662(f)) LEVY AND GARNISHMENT OF BENEFITS. Generally, Social Security benefits are exempt from execution, levy, attachment, garnishment, or other legal process, or from the operation of any bankruptcy or insolvency law.

Can the government lower your Social Security benefits? ›

If you receive a retirement or disability pension from a federal, state, or local government based on your own work for which you didn't pay Social Security taxes, we may reduce your Social Security spouses or widows or widowers benefits. This fact sheet provides answers to questions you may have about the reduction.

What debts can be taken from Social Security? ›

Section 459 of the Social Security Act (42 U.S.C. 659) permits Social Security to withhold current and continuing Social Security payments to enforce your legal obligation to pay child support, alimony, or restitution.

Videos

1. GOP negotiator says debt ceiling talks are on pause as deadline looms
(ABC News)
2. Debt-ceiling talks hit roadblock, as deadline looms
(KITV)
3. Economic crash looms as time is running out on debt ceiling deal, experts say
(WUSA9)
4. Senior staffers tapped to lead negotiations on raising debt ceiling as deadline looms
(CBS Mornings)
5. Debt ceiling talks break down with default deadline coming fast
(CBS News)
6. MUST SEE: David Schweikert Picks Apart 'Democrat Math' Piece By Piece As Debt Limit Deadline Looms
(Forbes Breaking News)
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