The United States has a few days left to address the looming debt ceiling and avoid an economic calamity as the US Treasury is likely to exhaust its extraordinary measures if Congress did not raise or suspend the debt limit by October 18.
Exactly when the US will hit its debt ceiling is unclear — tax receipts are due soon — but the US Treasury has offered October 18 as an estimate.
“If it is not raised or suspended, only a lack of precedent spares us from knowing in detail the severity of the fallout,” according to the Financial Times.
“Catastrophic economic consequences” is how Treasury Secretary Janet Yellen put it.
The US has a legal limit on the amount of federal debt it can issue, which Congress has to raise or suspend every so often to continue paying its bills.
Every year, Congress passes a budget that includes government spending on infrastructure, programmes such as Social Security and salaries for federal workers. Congress also taxes people to pay for all that spending.
But for years, the government has been spending more than it takes in from taxes and other revenue, increasing the federal deficit.
The government needs to borrow money to continue paying out what the Congress has already cleared. The debt ceiling puts a limit on how much money the US government can borrow to pay its bills.
The country hit its $28.4tn ceiling on August 1 and the Treasury estimates it will run out of ways to pay its obligations on October 18.
According to the Treasury, the debt ceiling has been raised, suspended or otherwise delayed 78 times since 1960: 29 times under Democratic administrations and 49 times under Republicans.
A 2019 budget measure passed under former president Donald Trump suspended the limit for two years, and when it was reinstated on August 1, the United States had reached its ceiling, and the national debt now stands at $28.4tn.
If lawmakers on Capitol Hill remain deadlocked on raising the debt ceiling, the government could go into default – essentially, unable to pay bills. That would directly impact the wallets of millions of Americans, including those who invest in the stock market and those who benefit from government programmes such as Social Security and Medicaid.
“It would be disastrous for the American economy, for global financial markets, and for millions of families and workers whose financial security would be jeopardised
by delayed payments,” Yellen warned lawmakers a few
days ago.
Moody’s Analytics has estimated that even a long impasse over the debt ceiling could cause the loss of nearly 6mn jobs, increase the unemployment rate to 9% (from 5.2% now) and cause the stock market to lose about a third of its value, wiping out $15tn in household wealth.
The good thing, however, is that United States has never defaulted on its debt, which forms a backbone of the global economic system.
Many analysts believe the US will be able to avert a crisis this time as well, which is essential to maintain the United States’ international standing.