The U.S. on Thursday hit the limit on the amount of debt the federal government can issue to honor its financial obligations, also known as the debt ceiling. The milestone is prompting a slew of warnings from Wall Street analysts and economists about the potential financial fallout if Congress fails to take action.
U.S. Treasury Secretary Janet Yellen said in a January 19 letter to congressional leaders that her agency is taking “extraordinary measures” that will allow the country to avoid an unprecedented default on its debt for at least the next few months.
The debt ceiling is currently at $31.4 trillion, representing borrowing that the Treasury undertakes to fund its financial obligations, ranging from safety-net benefits such as Social Security payments to interest on the national debt.
Yellen has urged congressional leaders to raise the debt limit, which is set by lawmakers, as soon as possible to avoid a fiscal crisis. But with a Republican-controlled House, it’s unclear whether lawmakers can reach a compromise to lift the ceiling. If lawmakers fail to come to an agreement, the “debt ceiling debacle risks a self-inflicted recession,” Gregory Daco, EY Parthenon chief economist, said in a report.
Failing to raise the debt ceiling could lead to an “unmitigated disaster,” said David Kelly, chief global strategist at JPMorgan Funds, told investors in a client note.
But some skeptics say the U.S. has options to skirt economic calamity, such as the possibility that the Treasury could even mint a platinum coin that could be deposited at the Federal Reserve and used to meet its financial obligations.
Here’s what to know about the debt limit and its potential impact on the economy.
What is the debt limit?
The debt limit, which is set by Congress, represents the maximum amount the federal government is allowed to borrow to pay its debts.
If the amount of government debt reaches that threshold and lawmakers fail to lift the borrowing limit, the U.S. would be unable to pay what it owes and could default.
It’s important to note that when Congress raises or suspends the debt ceiling, it isn’t greenlighting new spending. Instead, it is giving the go-ahead for the Treasury to pay for spending that has already been approved.
Has the debt limit ever been raised before?
Yes, many times. Since 1960, Congress has acted 78 times to raise, temporarily extend or revise the definition of the debt limit, according to Treasury. The debt limit was changed 49 times under Republican presidents and 29 times under Democratic administrations.
The last time the debt ceiling was lifted was in December 2021, when Democrats controlled both the House and Senate.
What happens if the debt limit isn’t raised?
With the U.S. approaching the debt ceiling on Thursday, Treasury can take several steps to ensure it keeps paying the nation’s bills.
“These special accounting measures should provide Treasury with around $400 billion in additional borrowing capacity under the debt ceiling,” Daco of EY Parthenon said in his note.
But, without congressional action, the U.S. could face a default on its debts as soon as June, Yellen warned last week.
What does “Date X” mean?
“Date X” — or sometimes called the “X Date” — is the day when the U.S. government would be unable to meet its financial obligations, a point which would likely deliver “catastrophic consequences for financial markets and Americans throughout the country,” according to the Bipartisan Policy Center.
At the moment, Yellen places Date X in June, but other estimates vary. The bottom line is that the U.S. could be months away from defaulting if the debt limit isn’t raised.
“Debt limit X date is a moving target,” noted Height Securities’ Benjamin Salisbury in a research note. “Yellen’s prediction that a default could come as early as June is months ahead of previous projections, which put the date around sometime in August.”
What happens if the U.S. defaults on its debt?
If the U.S. reaches a date when it is no longer able to pay interest on the trillions it already owes, and defaults — something that has never happened in the nation’s history — the result could be catastrophic, according to some economists.
Because U.S. debt is considered the bedrock of the global financial system, due in part to its stability, a default could shake economies across the world. Americans could also face a recession, including higher unemployment, and the stock and bond markets would likely plunge. Recipients of federal benefits, such as Social Security recipients, might not get their monthly checks.
Still, exactly how a default would ripple through the economy is uncertain and contingent on a number of factors.
“The economic effects of running out of available resources to meet federal government obligations would certainly be negative, but we note there is a high degree of uncertainty about the speed and magnitude of the impact the U.S. economy would incur,” analysts with BofA Research said in a research note. “Ultimately, it would depend on how long the breach persists, how Treasury manages the situation and how financial markets react.”
What about mandated spending?
This is where some experts disagree with the doomsday scenario. Economist James K. Galbraith wrote in Project Syndicate that Social Security, Medicare, Medicaid and interest payments are mandated spending. In essence, that means the U.S. by law must pay for these benefits.
“The U.S. Treasury must follow the law. Debt ceiling or no, it cannot legally default on any obligation,” Galbraith noted.
He added, “[T]he Treasury has no legal authority to single out Social Security or interest payments or anything else for cuts, and — so far as I know — it couldn’t stop those payments if it wanted to.”
Social Security has never failed to make a payment in its almost 100-year history, Galbraith noted.
Can the U.S. avoid a default without raising the debt limit?
Treasury and lawmakers have some options that could help the U.S. meet its financial obligations and avoid default, economists said.
First, Treasury has the authority to mint a platinum coin of any denomination. Yellen could, in theory, authorize a $1 trillion platinum coin and deposit it at the Fed, with the coin being used to meet its debt obligations. Notably, however, she has previously dismissed the idea as a “gimmick.”
Daco echoed Galbraith’s contention, noting that the constitutionality of the debt limit could be challenged because the 14th Amendment states that “the validity of the public debt of the United States, authorized by law, […] shall not be questioned.” But, Daco added, “this has been rejected as an option by prior administrations.”
And there is the possibility of a procedure called a “discharge motion” in Congress to lift the debt limit, Daco added.
This would “circumvent the need for the approval of a committee chair as well as the Speaker to be introduced for a floor vote — thus allowing moderate House Republicans to join Democrats in raising the debt limit,” he noted. “This procedure would, however, take well over a month, and as such, wouldn’t be a last-minute option.”
