The U.S. debt ceiling is a policy that prevents the total debt incurred by the U.S. from reaching a legislative limit. The debt ceiling limits the ability of the U.S. Treasury to borrow and requires Congressional approval. The U.S. Treasury requires Congress to take action to limit federal spending or change debt limits when the debt ceiling is near or expected to be reached. The debt ceiling is implemented to maintain the financial stability of the federal government and to keep the debt burden under control.
What Is the Current Debt Ceiling?
The U.S. debt ceiling refers to a legal upper limit set by the US Congress, which is subject to change. Under current law, the U.S. debt ceiling is $31,4B. The debt ceiling reached $10B at the end of 2007. The chart below shows the U.S. debt ceiling. The current debt limit was reached in January 2023.
source: barrons.com
What Happens if the U.S. Can’t Pay Its Debts?
If the debt ceiling is not raised, the U.S. may have trouble paying federal employees' salaries or meeting any federal expenses. There may be more problems, including:
Treasury Bonds: If the U.S. defaults on its debt, the federal government cannot make timely interest or principal payments. In that case, bond holders cannot receive payments, and that would lead to the loss of confidence and a drop in the value of treasury bonds.
Financial Markets: Default may lead to volatility and uncertainty in financial markets. Issues affecting treasury bonds can also affect other assets. Interest rates can rise as the value of stocks and other investment vehicles falls.
Public Services: Public services may also be affected by default. There may be difficulties in paying federal workers’ salaries and expenses in social, health, and other public services.
Economic Growth & Employment: Default can adversely affect economic growth and reduce employment. Businesses may reduce their workforce and avoid investing due to financial uncertainty and loss of confidence.
The Global Image of the USA and the Role of the USD: If the U.S. enters default, it will damage the USD on a global scale and lead to the loss of confidence in it. The USD has a significant role as the world’s reserve currency, and the financial trust in the U.S. may affect the value of the USD.
