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Hitting the national debt ceiling is a major worry for Washington right now.
On Friday, Treasury Secretary Janet Yellen warned that the U.S. is on track to reach the debt limit, or the cap on how much money money the federal government can borrow, by Thursday. The ceiling was last raised by $2.5 trillion in December 2021 to a total of $31.4 trillion.
In the past, Congress has avoided breaching the limit by simply raising it. But House Republicans said they will not support increasing the debt ceiling this time around — not unless they get spending cuts or other concessions.
In a letter to congressional leaders, Yellen said deadlock around the debt ceiling can cause “irreparable harm” to the economy and even global financial stability. She harkened back to 2011, when the U.S. reached its debt limit, wreaking havoc on the stock market.
If the U.S. reaches its debt ceiling, the Treasury will have to take “extraordinary measures”
If there’s a stalemate, a few things can happen.
First, the Treasury will begin to move money around to cover the shortfall in cash flow. These actions can only last for a few weeks or months. Once those measures run out, the federal government will have a hard time paying its obligations, like Social Security and Medicare.
So far, the U.S. has never defaulted on its debt. But Yellen warns that if Congress fails to act, that may happen as soon as June.
The debt ceiling has been raised often, but this time may be different
Although Congress has a pattern of raising the limit, the decision to increase the federal debt ceiling is never easy.
House Speaker Kevin McCarthy told President Biden that Republicans are interested in imposing a spending cap in exchange for temporarily raising the debt ceiling. McCarthy pointed to a 2019 spending deal between his predecessor and former President Donald Trump as a model. That agreement included bolstering spending for defense and domestic programs.
But White House press secretary Karine Jean-Pierre said Biden is not interested in negotiating.
“It’s not and should not be a political football. This is not political gamesmanship. This should be done without conditions,” she said in a press briefing on Friday.
When the U.S. hit its debt ceiling in 2011, it took months for the economy to recover
The last time the U.S. hit its debt ceiling was in 2011 and it rattled the markets, sunk stock prices, and took a toll on people’s retirement savings. It was also the first time that the federal government saw its credit rating downgraded.
Although the country avoided defaulting, the Treasury found that delays in raising the limit bruised the economy, which took months to recover.
So far, the markets are assuming this debt ceiling crisis will work out. But the 2011 debt ceiling breach shows that even brinkmanship can hurt investors, consumers and businesses.