Time is running out for the federal debt ceiling.
Lawmakers have until the end of the month to raise the debt ceiling again. In a Wall Street Journal editorial on Sunday, Treasury Secretary Janet Yellen said failure to act could trigger economic catastrophe.
While the legal cap on how much the United States can borrow does not affect what consumers can spend, if Congress cannot agree on a new debt limit by October, it will put a drag on everything from government payments to the ability to borrow, she warned.
“In a few days, millions of Americans could be strapped for cash,” Yellen said.
“Nearly 50 million seniors could stop receiving Social Security checks for some time. The troops could go unpaid. Millions of families who depend on the monthly child tax credit could experience delays.”
Why the federal borrowing limit keeps increasing
Federal debt is the amount the government currently owes for expenses such as social security, medicare, military salaries, and tax refunds.
The debt limit allows the government to finance these existing obligations.
“Raising the debt ceiling does not authorize additional spending of taxpayer money. Instead, when we raise the debt ceiling, we are effectively agreeing to increase the country’s credit card balances. “said Yellen.
Congress and the White House have changed the debt ceiling nearly 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling fell to almost $ 3 trillion from less than $ 1,000 billion. During the 1990s, it doubled to nearly $ 6 trillion, and doubled again in the 2000s to over $ 12 trillion.
In 2019, Congress voted to suspend the debt ceiling until July 31, 2021. Now the Treasury is using temporary “emergency measures” to buy more time so the government can continue to pay its debt obligations. duty bearers, ex-combatants and social security beneficiaries.
But once the government has exhausted these measures, it will no longer be able to issue debt and could run out of liquidity.
More from Personal Finance:
Here’s how to prioritize your financial goals
Here are some tips for beating inflation as prices start to rise
Impulse spending is a problem for many consumers
Of course, the US government has never defaulted on its debt, nor should it this time around. However, the threat of default has surfaced on several occasions. And even that has its consequences.
Some economists were hoping Senate Democrats would include an increase in the debt ceiling as part of the $ 3.5 trillion spending plan.
However, the budget resolution omitted the cap entirely, and the government will be on the verge of default as will Republicans and Democrats clash over the amount of federal spending.
“It’s a chicken financial game,” said Mark Hamrick, senior economic analyst at Bankrate.com.
Why only the threat of default has consequences
In the worst-case scenario, the federal government would default, at least temporarily, on some of its obligations, including Social Security payments, veterans benefits, and federal worker wages.
In addition, potential downgrades in US credit ratings would hit Treasuries. Demand for US Treasury bonds could fall if they are no longer viewed as a reliable and safe-haven investment and bondholders would demand significantly higher interest rates to offset the increased risk.
This, in turn, would drive up other borrowing costs, including credit cards, auto loans, and mortgage rates (which are typically indexed to the yields on U.S. Treasuries).
At the very least, the fear of default could shake the stock market and send shockwaves throughout the economy, according to Bankrate’s Hamrick.
“If you go back to a decade ago, there was an immediate liquidation in the financial markets – it hit investors hard and ran the risk of a cascading financial crisis,” he said.
In 2011, a deadlock on the debt ceiling in Congress brought the country closer to default before lawmakers finally reached a deal, but not without a deterioration in the country’s credit rating and significant volatility. of the market.
Between July and October of the same year, the S&P 500 fell more than 18%.
This time around, lenders could start tightening their standards up front to reduce their exposure – or risk – during what could be a controversial battle, said Yiming Ma, assistant professor of finance at Columbia University Business School.
“No one thinks it will be a default, but even uncertainty can impact borrowing terms and the availability of loans,” she said.
“If I was someone about to take out a loan, I would look at the terms now,” Ma added. “In the last few days there could be a frenzy.”
“We have learned from past deadlocks around the debt limit that waiting until the last minute to suspend or increase the debt limit can seriously damage business and consumer confidence, increase borrowing costs to short term for taxpayers and negatively impact the credit rating of the United States. United States, ”Yellen also wrote in a letter to House Speaker Nancy Pelosi earlier this month.
Subscribe to CNBC on YouTube.