- The US reached its debt ceiling, or debt ceiling, in January.
- On June 1st, the so-called “X date,” the public may also run out of money to pay all the bills.
- The government will not be able to pay everyone on time. To avoid a “technical default,” it is likely to prioritize payments to investors holding Treasuries.
- Payments such as Social Security, Medicare, tax refunds, and military salaries are likely to be delayed.
- Democrats and Republicans have yet to reach a deal to raise or stop the debt ceiling and avoid the consequences.
U.S. Senate Minority Leader Mitch McConnell, Republican Kentucky. House Speaker Kevin McCarthy, Republican, California. President Joe Biden. and Senate Majority Leader Chuck Schumer (NY) will meet in the Oval Office on May 9, 2023 to discuss the debt ceiling.
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It could be several more weeks before the US can no longer pay its bills. If this happens, it will likely have wide-ranging and painful economic repercussions for American households.
The impact of the debt ceiling conflict could delay payments issued by the federal government, such as Social Security, Medicare, tax refunds, military salaries, and many other large payments.
As an example, if the US only had 80 or 90 cents per dollar outstanding, it would be forced to defer certain payments.
“Somebody is running out of money,” said Michael Priese, senior economist at Wells Fargo Economics.
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There are many unknowns, including how long the delay will last and whether the government will prioritize certain payments. The US has never been in a situation like this, and the government has not issued a public roadmap outlining its response, so there is some speculation involved.
“We’re looking at some sort of contagion effect,” said Rachel Snyderman, senior deputy director for economic policy at the Center for Bipartisan Policy think tank. “The extent of infection is unknown.”
US Treasury Secretary Janet Yellen speaking in Washington, April 21, 2023.
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The U.S. is in this situation because of political conflicts related to the debt ceiling, also known as the debt ceiling. This cap is the amount the US is allowed to borrow to pay its bills.
The country has a budget deficit, which means it spends more than it earns. Therefore, in order to fulfill our obligations, we must borrow money.
Congress regularly raises or temporarily suspends the debt ceiling to avoid another scenario: default on Treasury bills and other federal payments.
My current problem is: The country reached its debt ceiling (currently $31.4 trillion) in January. Since then, the U.S. Treasury Department has been able to move funds to delay the so-called “X-date,” when the federal government fails to pay its bills in full.
Treasury Secretary Janet Yellen said that date could be as early as June 1. Said last week.
However, due to the political deadlock between Democrats and Republicans, no deal has so far come to fruition.
If the U.S. enters X-Date without a deal on a debt ceiling, it will be the first time in U.S. history that the federal government will intentionally renege on its financial promises.
This is where assumptions about who gets rewarded and when come into play. A few clues and educated guesses help answer that question.
The government will probably pay out investors and financial institutions that hold Treasuries first. These payments to bondholders are principal and interest.
Fed officials have hinted at the possibility of prioritizing bondholders. 2011 conference It followed the previous debt ceiling episode.
Otherwise, a “technical default” will be triggered. In other words, the United States will default on its debt payments.
Wells Fargo’s Pliese said a failure in federal payments would likely cause chaos, but a scenario in which Treasury debt defaults would “actually cause financial Armageddon.”
He said US Treasuries are the foundation of the entire global capital structure.
The US Treasury market, worth about $24 trillion, is the “largest and deepest bond market in the world,” according to a Wells Fargo research note.
They are held by all types of global investors, including US and foreign banks, insurance companies, retirement funds, mutual funds and exchange-traded funds, sovereign wealth funds, and individuals.
Investors regard them as risk-free assets. In theory, holding short-term government bonds is “the only very safe way you can do it” with your own money, Mr Pliese said.
“What would the world look like when there is no safe place?” economists asked, asking theoretical questions.
That means investors could panic and dump Treasuries, triggering a big drop in stocks.
Rating agencies are likely to downgrade U.S. government bonds. In addition to rising government borrowing costs, so too have borrowing costs for households with credit cards, mortgages, auto loans and other debts, which has been linked to the Treasury market.
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When you put bold people first, you inevitably put others second.
Snyderman of the Bipartisan Policy Center said prioritizing who comes next is a “big question mark” in a grand scheme of unknowns.
All federal payments are due. The delay may initially last a day or two, but will widen as the political stalemate drags on, he said.
Experts say the biggest impact will likely come from funding for Social Security benefits and health care programs such as Medicare, Medicaid, children’s health insurance programs, and Affordable Care Act medical plans.
For example, the government will pay about $100 billion each to Medicare and Social Security in June, far below other federal payment categories, according to the recent Center for Bipartisan Policy. analysis.
We are looking at some kind of contagion effect. The degree of infectivity is unknown.
Senior Deputy Director of Economic Policy, Center for Bipartisan Policy
Deferring payments to federal health programs could mean, for example, that some providers delay care for their subscribers. Experts say retirees may be living on a fixed income, which can make it difficult to pay their bills.
Other payments may also be affected: federal tax refunds. Supplemental nutrition assistance programs (also called food stamps). Payments to federal retirement plans, such as the Thrift Savings Plan. Educational programs such as the Pell Grant. Federal salaries similar to those of judges and active duty military personnel. Veterans Benefits. Such as payments to defense vendors and contractors.
It is unclear whether the government will prioritize specific payments within these broad groups. Experts say the most likely scenario is that funds are issued chronologically according to when a particular payment occurs in a calendar cycle.
“It has not been operationally, economically or legally tested at all,” Snyderman said. “We will be entering uncharted territory.”