You’ve probably been hearing about the massive problem of national debt for years. If you’re Gen Z, it’s been an issue all your conscious life. Since 2000, debt has soared from $5.6 trillion to over $31.38 trillion – a whopping 460% increase – while the country’s impending default has become a hot topic. (The oldest members of Generation Z were born in 1997, so have lived with financial doomsday warnings of debt since they were three.) Threats in Congress to deny raising the debt ceiling have also become more common in the last 20 years, In which Republicans, the party traditionally associated with deleveraging (although Republican Presidents George W. Bush and Donald Trump have both increased the deficit significantly), have typically pointed to the need to cut spending, while a Democrat is in office.
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Still, despite some tight decisions, the US has never defaulted on its debt obligations. But the tug-of-war is playing out again today, as Republican House Speaker Kevin McCarthy has refused to pass what Democratic President Joe Biden calls a “clean” debt ceiling bill (ie, with no associated spending cuts).
The debt ceiling is the legal upper limit for the total debt that the federal government can borrow to finance its spending. It’s not even a very old part of American history: It was enacted in another economic era, in 1917, when Congress was ironically attempting to streamline the fundraising process along with the start of World War I. The federal government technically hit its debt ceiling on January 19 of this year — the 79th time since 1960, according to the Treasury Department. As it has done on several occasions before, the Treasury Department has taken so-called “extraordinary measures” to continue paying America’s bills. But now the so-called ‘X-date’, by which even with these fiscal maneuvers the government will be unable to meet all of its commitments, is fast approaching, and Treasury Secretary Janet Yellen estimates that the country could soon reach 1 June.
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According to the Congressional Research Service, presidents of both Democratic and Republican governments have raised the cap more than 100 times since World War II. Although there have been many public arguments about it – perhaps most notably in 2011 and 2013 – the parties have always reached an agreement.
Yellen has denounced the “catastrophic” impact of a default not only on markets, the dollar’s reputation and US creditworthiness, but also on the personal finances of large parts of the country. Experts like Mark Zandi, chief economist at Moody’s Analytics, agree when he recently testified before Congress, “The Treasury Department’s debt ceiling is an immediate threat to any optimism that the economy can avoid the recession in the coming year and poses a long-term threat.” represents the country’s finances and economic growth.”
So how could it hurt you if the debt ceiling is not raised – and the national debt can no longer be paid? Here are three possible “catastrophic” financial disasters that could happen.
1 – Late Social Security payments
No one knows exactly how the government would respond to an unprecedented default, but the US government could immediately divert money toward its debt while forgoing payments to tens of millions of Social Security recipients.
“Social Security recipients who see delays in their payments may have problems with expenses like rent and utilities,” write Wendy Edelberg of the Hamilton Project Louise Sheiner of the Hutchins Center on Fiscal and Monetary Policy. “[F]”Contractors and employees would be faced with the uncertainty of how long their payments would be delayed.”
Ultimately, the state would pay for late benefits. But that could have disastrous implications for many seniors and other recipients who depend on their monthly payments to make ends meet.
2 – Higher interest rates
The economy has been plagued by higher interest rates for several months as the Federal Reserve ramped up its inflation-cutting campaign. Many financial pundits — including Zandi — have suggested that a recession is likely to occur this year. Failure to raise the debt ceiling would result in a recession almost immediately. “The timing couldn’t be worse for the economy,” he said.
So interest rates on mortgages, car loans, and credit cards have already risen, but a default would push them up even more — not to mention the cost of borrowing for businesses.
And even if the debt were paid off after a default, “interest rates wouldn’t go back to where they were before,” Zandi said, since government bonds were no longer viewed as risk-free by global investors, he predicted that “future generations of…” Americans would pay a heavy economic price.”
Even the threat of exceeding the debt ceiling can push interest rates higher: The debt ceiling impasse in 2011 resulted in increased borrowing costs totaling over $1 billion, according to the Government Accountability Office. And the current uncertainty is reportedly already causing mortgage rates to rise.
“If policymakers actually fail to raise or suspend the cap before the Treasury Department runs out of cash and fails to meet its obligations, interest rates will rise and stock prices will plummet, at a huge cost to taxpayers and the economy alike.” brings,” said Zandi.
3 – Job losses and market turmoil
White House economists recently estimated that up to 8 million people could lose their jobs in the event of a prolonged default. It would also almost certainly result in a recession that would affect all Americans in some way, as “an actual default would roil global financial markets and cause chaos,” according to the Federal Budget Committee. “Both domestic and international markets depend on the relative economic and political stability of US debt and the US economy.”
A default could put the country in a situation similar to that of the global financial crisis, according to the Moody’s report. That could result in $12 trillion in lost household wealth, with stocks potentially falling by as much as a third.
“The timing couldn’t be worse for the economy; even before the specter of a debt breach looms, many CEOs and economists believe a recession is likely this year,” the report says.
However, the stock market has remained strong so far even as the country approaches the X date.
“The quarterly federal income taxes are due on June 15. That’s going to bring a big revenue stream to the Treasury Department,” said Keith Singer, a Florida-based certified financial planner (CFP). “The question is, can we make it to June 15?”
Still, financial advisors advise not to panic. Most believe that Democrats and Republicans can reach an agreement to prevent outright chaos in the financial markets.
“In the coming weeks, should you register ahead of the upcoming . “Put simply, the US cannot afford to have its reputation tarnished.”
This story was originally published on Fortune.com
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