Throughout history and more often in recent years, the United States government has spent more money than it takes in. Deficit spending means that the government must borrow money to pay its bills daily.
The 2023 debt ceiling crisis puts the American economy at risk, could lead to more inflation, a steep drop in stock prices, and might endanger senior citizens and federal workers. But it is also an important opportunity to define the future of U.S. economic policy and spending.
Lastly, the choices made now and at each new spending limit may have a significant impact on your personal finances, businesses, and retirement.
What Could Happen if the U.S. Defaults?
A national government defaulting on its debts can have severe economic consequences that can reverberate throughout the global financial system. Based on historical information, some of the possible results of a government default are:
Increased interest rates — if a government —i.e., the U.S. government— defaults on its debts, investors may view its bonds as riskier and demand higher interest rates to compensate for the increased risk. Relatively higher interest rates result in higher borrowing costs for the government, which can lead to higher interest rates on other types of loans and credit products.
Lower government credit ratings — a government default can also lead to a downgrade in its credit rating, making it more difficult and expensive for the government to borrow in the future. Since taxpayers foot the bill, a change in the U.S. government's credit rating costs Americans billions of dollars. This actually happened after the 2011 debt ceiling crisis. Standard & Poor's downgraded U.S. government debt from AAA to AA+ on August 5 of that year.
A downgrade can also affect the credit ratings of other entities within the country, such as corporations and individuals.
Stock market shock — a government default can cause a shock to financial markets, potentially leading to a sell-off of stocks and other assets. Obviously, declining stock prices can damage the value of retirement accounts and other investments. And let's not forget that stock prices are already not doing great thanks, in part, to the banking crisis.
Economic recession — forget the fact that we may already be in an economic recession; a government default can lead to a contraction in economic activity, potentially resulting in a recession. This can lead to higher unemployment rates, decreased economic growth, and other negative consequences for the country and its citizens.
Fortunately, the U.S. government will not default —that is a foregone conclusion. Congress will wait until the last possible moment, but the ceiling will rise and debts will be paid.
Let's hope they also stop overspending.
The History of the U.S. Debt Ceiling
Early in U.S. history, Congress needed to vote to borrow money. But that changed, and eventually, Congress set a statutory limit on how much the Treasury could borrow, i.e., the debt ceiling.
The debt ceiling is a legal limit on the amount of money the U.S. government can borrow to finance its operations.
During the First World War, the U.S. government needed to borrow money to finance its war efforts. To facilitate borrowing, Congress passed the Second Liberty Bond Act of 1917, which authorized the U.S. Treasury to issue bonds to finance the war. The act also established a limit on the total amount of bonds the Treasury Department could issue, which was equivalent to the total debt outstanding at the time.
The debt ceiling continued to be a feature of U.S. fiscal policy, but it was not always a hard limit. In 1939, Congress established a soft debt limit that allowed the Treasury to exceed the limit with the approval of Congress. In 1941, Congress eliminated the soft limit and set a hard limit, which required the Treasury to seek congressional approval to increase the debt limit.
Since then, Congress has increased the debt ceiling many times to accommodate increases in government spending and borrowing. In February 1941, for example, the debt limit was $65 billion. By March 17, 1971 —roughly 30 years later— the U.S. debt limit have risen to $430 billion. At the time of writing, the U.S. debt ceiling was $31.381 trillion.
It is important to remember that the U.S. debt ceiling is not about future spending; rather, it is a result of what Congress has already spent. The funds the Treasury Department is trying to borrow will be used to pay bills related to money Congress already told it to spend.
The U.S. federal debt, then, refers to the total amount of money the federal government has borrowed over time to finance its operations and pay for programs and services. It includes debt held by the public, which is money that the government owes to investors who have bought U.S. Treasury securities, and debt held by government accounts, which is money that the government owes to itself.
The size of the federal debt is often measured relative to the size of the economy using a metric called the debt-to-GDP ratio. This ratio compares the total amount of federal debt to the total output of the U.S. economy, as measured by gross domestic product (GDP).
The debt-to-GDP ratio is an important indicator of a country's fiscal health because it reflects the government's ability to service its debt obligations relative to the size of the economy. When the debt-to-GDP ratio is high, it can indicate that the government is borrowing beyond its means and may have difficulty paying back its debt in the future.
When the debt-to-GDP ratio is low, it can indicate that the government has room to borrow more to finance investments that could boost economic growth.
On March 25, 2023, at about 2:00 pm Eastern Standard Time, the U.S. federal debt was $31,461,290,165,584.
2023 Debt Crisis
In January 2023, the U.S. federal debt hit the debt ceiling, and the Department of Treasury took some "extraordinary measures" to avoid defaulting on its loans and interest payments.
"Dear Mr. Speaker: Public Law 117-73 increased the statutory debt limit to approximately $31.381 trillion on December 16, 2021. As you know, the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments," wrote Secretary of the Treasury, Janet L. Yellen in a January 13, 2023 letter to House Speaker, The Honorable Kevin McCarthy (R-CA).
"I am writing to inform you that beginning on Thursday, January 19, 2023, the outstanding debt of the United States is projected to reach the statutory limit. Once the limit is reached, Treasury will need to start taking certain extraordinary measures to prevent the United States from defaulting on its obligations," Yellen continued.
Yellen is in a rough spot. Whatever one thinks of her economic opinions and policies, she is responsible for paying the country's bills, and she does not have enough money to do it.
The real problem is in how much money Congress spends.
- "U.S. Debt Ceiling: Definition, History, Pros, Cons, Clashes" from Investopedia.
- "Debt Limit" via the U.S. Department of Treasury.
- "What is the national debt?" via the U.S. Department of Treasury.
- "National Debt by Year" from the Balance.
- "Historical Debt Outstanding" from the U.S. Department of Treasury
- "Don’t Give an Inch on the Debt Ceiling" by E.J. Antoni.
- "On the Debt Limit Fight, It’s Time To End Business As Usual" by Paul Winfree.
- "From Concerning to Terrifying: 7 Horrible Milestones on Horizon for Bloated Federal Budget" by Preston Brashers.
- "America Is Hurtling Toward Financial Calamity. It’s Not Too Late To Change Course" by E.J. Antoni.
- "Averting a Debt-Ceiling Disaster" by Michael R. Strain.
- "What to Do About the Debt Ceiling" by Matthew Continetti.
- "Yes, Use the Debt Ceiling to Control Government Spending" by Phil Gramm.
- "Actually, the US Can Default on Its Debt" by Desmond Lachman.
- "How worried should we be if the debt ceiling isn’t lifted?" by Wendy Edelberg and Louise Sheiner.
- "7 things to know about the debt limit" by Leonard Burman and William G. Gale.
- "Why Congress needs to abolish the debt limit: Testimony before the House Budget Committee" by Louise Sheiner.
- Video: "The Debt Ceiling Explained: Why You Should Care" from the Wall Street Journal.
- Video: "'Economically And Financially Catastrophic': Yellen Warns Against Failing To Raise Debt Ceiling" from Forbes.
- Video: "Sen. Rick Scott, Rep. Scott Perry Host Press Conference on Debt Ceiling and Spending Reforms"