Issue #10: The USA are at their Limit, Again.
If the US were to default on its debt, it could have devastating consequences. What can we do about it?
Hi everyone, welcome back. Firstly I would like to give a big thanks to all of you who read and shared the previous edition. In this week’s brief we’ll be having a look at the US debt crisis.
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Meaningful Numbers:
Today I am extremely grateful to those at the Borgen Project who have supplied me with the meaningful numbers graphic for today. If you would like to find out more about their work there will be a link at the end of todays newsletter for you to find out more.
Vehicles Per Person
Food for Thought
Summary:
The debt ceiling is a limit set by the legislative branch of the government on the amount of debt the government can borrow. In the United States, Congress determines the debt ceiling, which restricts the Treasury's ability to issue debt. When the government spends more than it collects in revenue, it borrows by issuing Treasury bonds, but it can only do so up to the debt ceiling. Failure to raise or suspend the debt ceiling can lead to severe consequences such as a government shutdown, delayed payments, and damage to the country's creditworthiness. The primary purpose of the debt ceiling is to promote responsible fiscal management, ensure democratic processes and legislative scrutiny, and stimulate discussions on fiscal responsibility and government spending. The current political situation involves negotiations between Republicans and Democrats over policy changes in exchange for raising the debt ceiling. If the US were to default on its debt, it could result in significant job losses, recession, global financial upheaval, credit rating downgrades, disrupted government functions, and economic consequences impacting various sectors.
The Curious Intellect: The USA are at their Limit, Again.
There is turmoil in the US. What is it about you may ask? Well this time it’s about the national debt and what the hell to do about it.
What is the debt ceiling?
The debt ceiling, also known as the debt limit, is a statutory limit set by the legislative branch of a government on the amount of debt that the government can legally borrow to fund its operations and meet its financial obligations.
In the United States, the debt ceiling is a limit set by Congress on the amount of debt the U.S. Department of the Treasury can issue to cover the government's expenses. It was established under the Second Liberty Bond Act of 1917 and has been raised numerous times throughout history.
When the government spends more money than it collects in revenue through taxes and other sources, it finances the deficit by issuing Treasury bonds and other debt instruments. However, the government can only issue debt up to the level of the debt ceiling. If the outstanding debt approaches or reaches the limit, the government faces a potential debt default or a situation where it cannot meet its financial obligations.
To avoid defaulting on its debt, the government needs to raise or suspend the debt ceiling, which requires legislative action. This is something that the president has no control over and that has a lot of significance as we will see later on.
Congress can either increase the limit to allow more borrowing or suspend it temporarily, effectively removing the limit for a specific period. Raising the debt ceiling does not authorize new spending or increase the government's budget; it simply allows the government to borrow the necessary funds to cover its existing obligations.
The debt ceiling is a controversial and politically charged topic, often leading to debates and negotiations in Congress. Failure to raise or suspend the debt ceiling in a timely manner could have severe consequences, such as a government shutdown, delays in payments to government employees and contractors, disruption of essential services, and damage to the country's creditworthiness.
Why is there a debt ceiling?
All in all the primary purpose of the debt ceiling is to encourage responsible fiscal management and prevent excessive government borrowing. By setting a limit on the amount of debt the government can incur, it forces policymakers to periodically review and assess the nation's fiscal situation. It requires them to consider the long-term implications of increasing debt and evaluate the need for additional borrowing in relation to the government's revenue and spending.
The debt ceiling also serves as a check and balance on the executive branch's authority to borrow money. It gives Congress, as the representative body of the people, the power to authorize and control the government's borrowing capacity. This ensures that decisions regarding debt issuance are subject to democratic processes and legislative scrutiny.
The debt ceiling can also be seen as a tool for raising awareness and sparking debates about fiscal responsibility, government spending, and the national debt. It provides a platform for discussions on budget priorities, fiscal policies, and the sustainability of government finances. Which it has done to a great extent as whenever the discussion of raising the debt ceiling crops up there is undoubtedly heavy national coverage that follows.
The Politics of the Debt Ceiling
When the presidency and the House of Representatives are controlled by different parties ( as we see now), the party in the House that opposes the president's agenda has historically used the debt ceiling as a means to extract concessions or policy changes. At the moment Republicans in the house are threatening to withhold support for raising or suspending the debt ceiling unless their demands are met. At the moment Republicans want five things in exchange for raising the debt ceiling.
Work requirements for entitlements
Spending cuts or caps
Recoup appropriated but unspent pandemic money
Permitting reform
Making cuts to Biden's signature climate legislation
As we can see there is alot of negotiation that has to occur for anything meaningful to happen. It also has to happen soon. As in June 1st soon.
What happens if the US defaults
So that does beg the question. What if the US defaults on its debt? According to forecasts by the White House even a brief default would result in half a million lost jobs and a somewhat shallow recession. A protracted default would push those numbers to a devastating eight million lost jobs and a severe recession, with the economy shrinking by more than 6 percent.
Global financial upheaval: A default might result in a loss of faith in the U.S. government and a panic on the world's markets since the global financial system depends on U.S. Treasury bonds and currencies. An interruption in global commerce and a decline in asset values would be the most obvious effects of this. The severity of the US default and the speed at which the US might regain market confidence would decide how long such a panic would last.
Potential credit rating decline: If the United States were to default on its financial obligations, credit rating agencies would likely downgrade the nation's credit rating. This downgrade would result in increased borrowing costs for the U.S. government in the future. An example of such a downgrade occurred in 2011 when Standard & Poor's downgraded the U.S.'s credit rating for the first time ever, despite the absence of an actual default. The implications of a potential default on the U.S.'s credit rating are profound, and one can only imagine the repercussions if a default were to actually happen.
Disrupted government functions: The consequences of an actual default, or even a technical default, would extend beyond credit ratings. Such a situation could force the government to delay payments to Social Security recipients, employees, and others who rely on government services. This delay would have a significant impact on the lives of millions of Americans and could severely impede economic growth. Recognizing the potential severity of this scenario, the White House released a comprehensive report in October 2021, outlining the potential consequences of a default and how it could affect various sectors of the economy.
Additionally, the report shed light on the broader economic impact of a default. It emphasized how the disruption caused by delayed payments and uncertainty could reverberate throughout various sectors, hampering economic growth. The potential damage to investor confidence, increased borrowing costs, and a loss of trust in the U.S. government's ability to meet its financial obligations would have far-reaching implications for businesses, consumers, and financial markets.
The debt ceiling is a crucial and contentious aspect of government finances. It serves as a mechanism to encourage responsible fiscal management and provides a platform for debates on fiscal responsibility and government spending. However, the political dynamics surrounding the debt ceiling can lead to negotiations and potential brinkmanship, as seen in the current situation. The consequences of a failure to raise or suspend the debt ceiling can be severe, and they will if it happens. i The potential risks of a default on the US debt are far-reaching, with potential job losses, recession, global financial upheaval, and disruptions to government functions. It is essential for policymakers to navigate these challenges responsibly and ensure the stability of the nation's finances to protect the economy and the well-being of its citizens.
The Borgen Project
In 1999, while working as a young volunteer in refugee camps during the Kosovo War and genocide, Clint Borgen recognized the need for an organization that could focus U.S. political attention on extreme poverty. In 2003, after graduating from Washington State University and interning at the United Nations, Borgen began developing the organization.
In need of startup funding, Borgen took a job living on a fishing vessel docked in Dutch Harbor, Alaska (the same location as “The Deadliest Catch”). From humble beginnings in one of the most remote regions of the world, The Borgen Project was born. One man with a laptop and a budget that came from his Alaska paychecks has evolved into a national campaign with volunteers operating in 911 U.S. cities.
I think this is an incredibly good cause and I urge you to all have a look at their work
Thanks - See you next time 👋
-Luke