President-elect Donald Trump on Wednesday shone a highlight on the debt ceiling, rejecting a bipartisan authorities funding deal negotiated by Home Speaker Mike Johnson and demanding lawmakers increase the debt ceiling as they fund the federal government.
However in a Thursday interview with ABC Information’ Jonathan Karl, Trump advised the affect of the U.S. authorities defaulting on its payments might “probably imply nothing.”
“No one actually is aware of. It means nothing, however psychologically, it might imply loads, proper? In different phrases, it would not have an actual which means aside from you’ve got violated one thing,” Trump instructed Karl. “And that could be simply, you understand, someday, half a narrative, or it might result in the melancholy of 1929, and no person needs to take the possibility, besides the Democrats.”
Regardless of Trump’s suggestion, financial consultants have stated they agree that breaching the debt ceiling would definitely result in financial chaos.
The usCapitol is seen on Capitol Hill in Washington, Dec. 19, 2024.
Anna Rose Layden/Reuters
“It could be disastrous for the American financial system, for world monetary markets and for thousands and thousands of households and employees whose monetary safety can be jeopardized by delayed funds,” Treasury Secretary Janet Yellen warned lawmakers throughout a 2021 standoff over the debt ceiling.
Elevating the debt ceiling, Yellen testified, is “essential to avert a catastrophic occasion for our financial system.”
This is a primer on the debt ceiling and examples of the potential penalties if america is unable to pay its money owed.
What’s the debt ceiling?
The debt ceiling is a cap on the amount of cash the U.S. authorities can borrow to pay its money owed.
Yearly, Congress passes a finances that features authorities spending on infrastructure, salaries for federal employees and applications similar to Social Safety. Congress additionally taxes individuals to pay for all that spending. However for years, the federal government has been spending greater than it takes in from taxes and different income, rising the federal deficit.
The federal government must borrow cash to proceed paying out what Congress has already accepted, however the debt ceiling places a restrict on how a lot cash the U.S. authorities can borrow to pay its payments.
Sen. John Thune talks to reporters concerning the proposed finances persevering with decision that may keep away from a looming authorities shutdown on the U.S. Capitol, Dec. 18, 2024, in Washington.
Chip Somodevilla/Getty Photographs
What would occur if the US can now not pay its payments?
If the federal government can not borrow cash to proceed paying for applications, there shall be real-world results for thousands and thousands of individuals. Listed here are among the potential ones, in keeping with the Treasury Division and the Committee for a Accountable Federal Finances, a nonpartisan group.
- Tens of millions of seniors might cease receiving Social Safety funds or see delays.
- The USA’ credit score worthiness might be downgraded, spiking rates of interest, which might increase mortgage, automobile and bank card funds
- Doubt within the usually dependable U.S. foreign money might tank the markets, hurting 401(okay)s and different investments (The S&P 500 misplaced 17% within the months surrounding the 2011 debt ceiling standoff.)
- U.S. navy service members might cease receiving paychecks
- Veterans’ advantages might cease or be delayed
- Postal employees and federal staff might cease receiving paychecks
- Federal Emergency Administration Company funding for hurricane and wildfire victims might cease
- Baby vitamin applications and different meals help might cease
In 2023, Moody’s Analytics estimated {that a} protracted breach of the debt ceiling would trigger comparable results to the 2008 financial disaster. It stated it might value the financial system greater than 7 million jobs and see inventory costs fall by virtually a fifth, wiping out $10 trillion in family debt.
Speaker of the Home Mike Johnson takes questions from reporters after presenting his last model of an interim pending invoice to his caucus, on the Capitol in Washington, Dec. 17, 2024.
J. Scott Applewhite/AP
Would this be worse than a authorities shutdown?
Sure. That is a good larger deal than a authorities shutdown. A authorities shutdown happens when Congress doesn’t approve a brand new spending invoice for the following fiscal 12 months, so new funds, similar to paychecks, are stopped. In 2019, round 800,000 federal staff have been affected by a authorities shutdown, and markets dipped.
However the U.S. has by no means defaulted on its debt. Such an unprecedented state of affairs would destabilize markets, spike rates of interest and roil the financial system. Some funds that proceed beneath authorities shutdowns, such the Social Safety funds many seniors depend on as their revenue, might be stopped.
“Many extra events aren’t paid in a default,” the Committee for a Accountable Federal Finances stated. “With out sufficient cash to pay its payments, any of the funds are in danger, together with all authorities spending, necessary funds, curiosity on our debt and funds to U.S. bondholders. Whereas a authorities shutdown can be disruptive, a authorities default might be disastrous.”
For the reason that debt ceiling system was instituted in 1917, Congress has by no means not raised the debt ceiling. Congress has voted 78 instances to lift or droop the debt restrict since 1960.
