U.S. Debt Ceiling
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According to Treasury Secretary Janet Yellen, the United States debt ceiling, the limit of national debt that the U.S. Treasury can incur, is approaching as early as June 1st. However, Moody’s, a rating agency, calculated that the date the government could run out of money is around mid-August.
A U.S. default would be unprecedented, and the exact ramifications are unclear. However, in any default scenario, it would severely damage the U.S. economy.
For example, a recession would begin quickly, interest rates on treasury bonds, mortgages, and credit cards would increase, and significant job losses would occur. Such a situation would affect everyone, from businesses to the general population, but the seriousness of what happens would depend on what kind of default occurs.
If it is a technical or short-term default that lasts a few weeks, maybe some payments are prioritized, with some made on time, and some aren’t made on time; it has been calculated that around two million lost jobs, businesses would have trouble accessing finance, general financial instability, and lack of business and consumer confidence.
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In a worst-case scenario, in which the default is prolonged, such as more than three months, it is estimated that the economy could contract by about four percent, and around seven million jobs could be lost. The government then would have to make significant spending cuts which could lead to a disruption in public services, and according to some estimates, financial markets would lose around one-fifth of their overall value. With no cash available, the U.S. government would have limited policy options to stabilize the economy. Any U.S. economic issue becomes a global issue in which there would be a lack of confidence in the global financial system overall.
In both default scenarios, there is an increased risk of protests and arrests. The most likely outcome is a negotiated settlement to raise the debt ceiling; however, as the deadline date approaches, a potential default will cause significant disruption to the financial markets, like what we saw in 2011 and then again in 2013.
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