The United States is facing a potential economic disaster as negotiations over the debt ceiling continue.[0] The debt ceiling is a federally imposed limit on how much debt the federal government can rack up, and every time the government gets close to that ceiling, Congress needs to raise it and say it’s okay to keep taking on debt.[0] Failure to do so could result in the US defaulting on its debts and not making interest payments. However, predictions of the consequences vary from mildly bad to total and complete disaster to the tune of trillions of dollars, and nobody knows exactly what will happen if the US breaches the debt ceiling.
As negotiations continue, the likelihood of witnessing the consequences in vivid detail is growing with each passing moment.[0] The uncertainty might increase borrowing costs, destabilize financial markets, and make an already shaky economy even shakier.[0] The standoff could damage confidence in the US financial system and government, and it’s not great for the US to look like clowns on the international stage.[0]
The risks facing T-bills, which are widely used for cash management, are also increasing.[1] T-bills with a short-term maturity period, falling between June 6th and 15th, are currently generating a yield of 5.997%. This indicates the apprehension surrounding the timely resolution of the debt ceiling and the potential default of government financial obligations.[2] [3] The cost of insuring US debt is also rising, with investors beginning to view US bonds and other securities as increasingly risky.[4]
If the US breaches the debt ceiling, the Treasury could take three potential responses, any of which would deepen the negative economic impact.[5] One potential response is to prioritize principal and interest payments, allowing the government to continue meeting its debt payments for a short time and avoiding some of the worst financial and economic effects.[5] Nevertheless, this would still constitute a failure to meet financial obligations and could significantly weaken the trustworthiness of the United States’ creditworthiness. The value of the dollar would fall sharply, and bond yields would rise by a larger margin than in the core forecast.[5] Asset prices would drop sharply as economic fears mount, and US GDP would contract slightly in 2023 and remain subdued in 2024.[5] The US’s credit rating would also be downgraded, keeping the dollar weaker and bond yields higher than they were prior to the debt crisis throughout the forecast period (2023‑27).[5]
With US political polarization at an all-time high, votes to raise the debt ceiling have remained contentious and will continue to occur.[6] The expiration of the debt ceiling in 2013 led to a government shutdown due to the ensuing debate over the limit. Similarly, in 2021, the issue once again approached a critical point before resolution.[6] As US policymakers once more deliberate an increase to the debt ceiling in 2023, President Biden has said he will settle for nothing less than a no-strings-attached increase.[6]
It is best for us to remain ignorant about the consequences for the economy in case the US fails to reach a consensus on the debt ceiling. It is hoped that the negotiators in Washington also realize this.[0]
0. “What a US debt ceiling breach could do to the economy” Vox.com, 26 May. 2023, https://www.vox.com/money/2023/5/24/23736112/debt-ceiling-economy-default-treasury-janet-yellen-stock-market
1. “Views From the Floor – 23 May 2023 | Man Institute” The Man Group, 23 May. 2023, https://www.man.com/maninstitute/views-from-the-floor-2023-may-23
2. “Debt-Ceiling Drama Has Some T-Bills Trading Like Junk Bonds” Bloomberg, 24 May. 2023, https://www.bloomberg.com/news/articles/2023-05-24/debt-ceiling-drama-has-some-t-bills-trading-like-junk-bonds
3. “The solution to the raising the U.S. debt ceiling is not going to be a cake walk” Kitco NEWS, 24 May. 2023, https://www.kitco.com/commentaries/2023-05-23/The-solution-to-the-raising-the-U-S-debt-ceiling-is-not-going-to-be-a-cake-walk.html
4. “Default Fears Push Yields On Short-Term T-Bills To Over 7% — JPMorgan Says 1-in-4 Chance US Will Hit Date” Benzinga, 25 May. 2023, https://www.benzinga.com/news/23/05/32566693/default-fears-push-yields-on-short-term-t-bills-to-over-7-jpmorgan-says-1-in-4-chance-us-will-hit-da
5. “How the debt-ceiling crisis could play out: four scenarios” Economist Intelligence Unit, 24 May. 2023, https://www.eiu.com/n/how-the-debt-ceiling-crisis-could-play-out-four-scenarios/
6. “Weekend Reading – Debt ceilings and dividends” My Own Advisor, 27 May. 2023, https://www.myownadvisor.ca/weekend-reading-debt-ceilings-and-dividends/