In the United States, the debt ceiling is a critical issue that impacts the country’s economy. The debt ceiling is a legal limit on how much money the U.S. government can borrow to pay its bills and the issue of raising it often comes to the forefront. But what if the debt ceiling isn’t raised? In this article, we’ll explore the impact of it on the US economy.
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What if the Debt Ceiling isn’t Raised? Explained
The US government runs on a deficit budget which means that they spend more than they make in revenue through taxes. To meet the surplus requirements the country needs to borrow funds from concerned parties. However, once an economy hits the limit of borrowing there is nowhere else to go as no one is willing to lend more money to you. This is the situation that the US is currently staring at.
Now the one solution that the US has is raising the debt ceiling. However, it’s easier said than done and so far it is not an option. So the question here is what if the debt ceiling isn’t raised? As it turns out the US has money to run things smoothly till June but after that they will have to rely on tax money solely. This means some obligations such as paying salaries of public sector employees, paying pensions, and a few other public expenditures may not happen.
The US’s major debt is held within the country. Japan, China, and the UK are some of its major securities treasury holders outside of the country. Their government debt is considered the safest asset in the financial system and for that reason, a considerable chunk of the price of other assets is derived from the price of the former. So if the US defaults on its debt then:
- There would be a large spike in borrowing costs in America and this would trigger a large spike in borrowing costs across the world.
- Every asset that looked a safe bet would now lose most of its goodwill.
- There would be severe macroeconomic dislocations.
Issues with Debt
United States Debt is nothing new. Even in the past the country has struggled with its debt and seen similar situations but this time around things are a bit more serious. The US government borrows huge sums of money to pay its bills. They hit the debt limit on January 19th of this year. Though extraordinary methods are being taken now the situation is so sure that the plan will be exhausted by June.
This is when the US hits the debt ceiling and won’t be able to issue new debt and therefore they won’t be able to pay their bills. This will set a chain of actions in motion where the government will then default on their payments and this would push the global economy into turmoil. And for now, the most viable options available are to raise the borrowing cap or suspend it.
The US government owes trillions of dollars that belong to various entities such as the central bank, governments, etc. US Treasury bonds and other securities are included in these debts as they are considered to be the safest investment. Some countries across the globe have bought US Treasury Securities as well. The most US debt country wise lie with:
- Japan with 1.1 trillion dollars
- China with 859 billion dollars
- United Kingdom with 668 billion dollars
- Belgium with 331 billion dollars
- Luxembourg with 318 billion dollars
Cross-reference: The fight over the debt ceiling could sink the economy
US hits Debt Ceiling almost Every Year these Days
Since the COVID-19 pandemic, the global economic scene has already been very bad. The world was just getting back on its feet but here we are, staring again at the recurring problem of the US debt ceiling being hit. United States debt is a problem that keeps occurring every year now and most US debt is shared between two countries of which one is China. The idea of lifting or suspending the ceiling has been under discussion for quite some time now.
The borrowing cap limit is set at the figure of 31.381 trillion dollars. Last year was the first time when the national debt crossed the figure of 31 trillion dollars and this year it has gone one better. Now if the debt cap is to be raised then some spending cuts must take place as per Republicans. However, President Joe Biden has reassured that he won’t tie the issue of spending cuts with raising the debt ceiling.
Since we are talking about the debt ceiling all of you must be curious as to how big a figure we are looking at. For a nation as big and important as the US the debt ceiling is supposed to be huge and it indeed is. The US debt ceiling is very high and that is why it is a big cause of concern as we saw in the answer to the question – what if the debt ceiling isn’t raised?
The US debt ceiling is set at 31 trillion dollars. And they hit this ceiling back in January 2023. And now the situation is so bad that the nation has until the first week of June to bring things back on track or they risk affecting the economic situation not just of their own country but the world.
The United States is one of the biggest nations in the world as they are a superpower. For this reason, the United States debt concerns the whole world. Now you know what if the debt ceiling isn’t raised.
Only time will tell how much more damage the US debt ceiling can inflict on the world economy. Most US debt stems from spending that other nations would not approve of nor the citizens themselves would. So, there won’t be many sympathizers if they end up going down due to this fiasco.