U.S. Debt Ceiling Reached as Lawmakers Negotiate Solution - Consumer Justice Foundation

U.S. Debt Ceiling Reached as Lawmakers Negotiate Solution

Written by Faith Anderson on May 19, 2011

In the meantime, Congress predicts that failure to raise the debt ceiling would cause the stock market to plummet and interest rates to pitch, plunging the economy back into recession. Budget negotiations will continue over the next few weeks, and members of the House Tea Party Caucus assert that they will not vote to support a deal to increase the government’s credit limits. The majority of Republican voters also oppose a debt limit increase, although Americans as a whole seem to be undecided. Despite the prediction of “catastrophic economic consequences” in the wake of an opposed credit limit increase, voters hope that refusing to raise the debt ceiling will stop deficit spending and force automatic cuts in federal spending.

Economic Consequences of an Opposed Credit Limit Increase

If the government’s credit limit is not increased, a variety of government payments would have to be discontinued, delayed or decreased, including Social Security and Medicare payments, military salaries, unemployment benefits, tax refunds, and interest on debt. The debate about the credit limit increase has raised concerns about the economic risks of this decision; in a plea to congressional leaders, 62 business groups claimed that increasing the debt ceiling is critical to ensuring the confidence of global investors in the “creditworthiness” of the United States. These groups are concerned that, by defaulting on foreign debt payments, the slowly improving economic growth would be severely jeopardized by a massive increase in borrowing costs. Similar to consumers missing a credit card payment, interest rates on borrowed money would significantly increase as buyers of government bonds considered the possibility of the United States’ failure to repay. This would severely inhibit the government’s ability to decrease the nation’s debt, resulting in trillions of dollars in additional interest rates and significant economic effects for consumers.

The Negative Impact of the Debt Limit and Budget Deal on American Consumers

Economists estimate that a failure to come to a compromise by the August deadline would result in a decrease in government operations which would significantly impact American consumers. Serious backlash would be felt by several parts of the U.S. economy, including employment growth, and the housing market, as increases in mortgage rates are directly affiliated with the government’s costs of borrowing. Over the next several weeks, critical decisions will need to be made about the debt limit and budget deal, which will likely directly influence a reaction by the market. As of right now, the market remains stable, under the assumption that Washington will soon reach a compromise.

Although few immediate economic effects are expected to occur as government officials negotiate this deal, failure to reach a decision within the next few months could have grim consequences for the United States economy. Reaching the debt ceiling is a warning to the government, forcing lawmakers to either raise the debt ceiling or the country will go into default. Earlier this week, the Treasury announced a “debt issuance suspension period” for the Civil Service Retirement and Disability Fund (CSRDF), allowing the Treasury to “redeem a portion of existing Treasury securities held by that fund as investments.” According to the Treasury, it could create approximately $214 billion in “headroom” by taking drastic measures of this kind, and would restore the CSRDF and any other funds once the debt limit is increased. This has happened five times since 1996, the most recent of which occurred in 2006.

How Americans Can Protect Themselves from Economic Backlash

With Congress far from reaching a decision about raising the debt ceiling or leaving it in place, lawmakers warn Americans about the possible consequences of a government shutdown. According to officials, public services would stop, federal offices across the nation would be severely disrupted, and global markets would crash once the United States began to default on its foreign debts. On the other hand, many lawmakers are opposed to increasing the government’s debt limit, unless Congress imposes major reductions to the current budget. Congress is faced with one of the largest fiscal decisions it has ever experienced; by early August, it must not only decide whether or not to raise the debt limit, but if the decision is made in favor of increasing the limit, the fiscal 2012 budget must also be amended. If the debt ceiling isn’t raised, Congress may make the equally unfavorable decision of raising taxes to compensate for the country’s financial obligations. It would also be the first time since the country first adopted a debt ceiling 1917, at which point it was $11.5 billion, that Congress didn’t approve an increase in the debt limit. If the government fails to make a decision by the August deadline, and the Treasury exhausts its funds before a new debt limit is instituted, there will likely be serious economic consequences for many Americans.

Posted Under: United States
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