What if the US defaults on its debt?

By: I. Toledo

Without any promising solutions in sight, the American debt problem becomes increasingly worrisome as the deadline for raising it approaches. Possibly as soon as June 1st, the USA will not have enough money to meet all of its financial obligations without more borrowing, and if the debt ceiling isn’t raised or abolished until then, the USA will default on its debt, risking an economic collapse not just in the country, but in the entire world.
 
What is the debt ceiling?
The debt ceiling, also known as the debt limit, was set by Congress in 1917 and defines the total amount of money that the US government is authorized to borrow to meet its existing legal obligations, such as paying for federal employees, the military, Medicare and Social Security. Currently, the value for this stands at roughly 31.4 trillion dollars. However, by January this year, the country’s debt reached this very value, and since then the US has taken extraordinary measures to buy time before deciding what to do.
 
What happens if the US defaults?
Being the world’s largest economy, if the USA defaults on debt, it will take the whole world down with it. It would lead to turmoil in financial markets, with interest rates rising and the strength of the dollar declining, weakening the confidence in the US government for investing or borrowing, hence disrupting international trade. Even if the breach is short and the government manages to solve it after a few days, consequences would still disseminate and could potentially fuel calls for alternatives to the dollar, resulting in financial chaos.
 
What can the government do about it?
One of the possible courses of action for the American government is to raise the debt ceiling, however, this requires majority approval by both chambers of Congress, which leads to a long process of negotiation considering the deepening of US political polarization over the last decade. Whilst President Biden believes the problem can be fixed with his $6.8 trillion fiscal 2024 budget, this plan has been frowned upon by Republicans, which believe the right way to go is a spending reduction bill that would cut 2024 federal discretionary spending to fiscal 2022 levels.

With the clock ticking and no decision reached, an old idea is brought up by the Democrats: abolish the debt ceiling. This proposal has been met with resistance in the past but is now back in debate as the days go by and a possible doomsday approaches.

Although the future remains uncertain, President Biden affirms he is confident an agreement will be reached and that all leaders are determined not to default. Conversations are being held in the White House as negotiations about how to proceed continue.