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Thursday 16 March 2023

The Debt Ceiling And What It Means For You

On Thursday, Jan 19th, The U.S government hit its $31.4tn borrowing limit. Treasury Secretary Janet Yellen, in a letter to congressional leaders, stated that the US Treasury has begun to take 'extraordinary measures' to ensure that the department is still able to pay the government's bills.

Debt Ceiling

These short-term measures, made to create more borrowing capacity, include moves like the ceasing of investments into the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund.

However, Yellen has assured federal workers and retirees that the funds will be 'made whole' after a debt deal is reached and that they will be 'unaffected by these actions'.

Yellen has stated that these measures could allow the government to meet its commitments until June.

After that, she warned that the country would become in danger of defaulting on its debt.

What Is The Debt Ceiling?

The debt ceiling, put simply, is the legal limit on the amount that the federal government is able to borrow, through the treasury, to finance obligations approved by lawmakers and the president.

It was created over a century ago in order to make it easier for the federal government to borrow, though it has been augmented more than 100 times since the Second World War.

The current limit, $31.4n, was reached last Thursday. It is worth noting that the U.S. government funds much of its spending through this debt.

What Is Happening Now?

Raising the debt ceiling is currently of major importance to the government. This is because in raising the ceiling, the government would be able to borrow more money in order to satisfy spending that has already been approved by congress.

Conversely, failing to raise the ceiling would result in the government eventually failing to repay or write off its debts and thus would mean that the U.S. government would be in default.

However, the situation right now is fraught. Republicans in the House of Representatives have said that they will not agree to raise the debt ceiling unless the current Biden administration agrees to spending cuts.

So there is political stalemate. This is potentially dangerous as if the ceiling is not raised, and the government thus becomes unable to borrow, it would not have the money to pay its bills fully or on time.

This would mean that the government would likely have to temporarily delay payments or even default on some of its commitments.

This would mean negative ramifications for Social Security payments, the salaries of federal employees, among others.

Even the specter of default has consequences. For example, in 2011, during another debt ceiling crisis, the threat of a default resulted in the first credit rating downgrade in the history of the nation.

And if this situation is not resolved quickly, it may result in a similar situation to 2011, in which there was a great deal of market turmoil as a consequence of the credit rating downgrade.

Furthermore, any negative change to the U.S. credit rating would likely result in rates on other types of debt, such as mortgage and car loans, being raised due to increased risk.

The Good News

A question that this situation has raised for many is: will the government hitting the debt ceiling affect my finances?

Several reports have stated that it is not something for individuals or investors to worry about.

Brad MacMillan, CFO for the Commonwealth Financial Network, has answered the above question with 'in word, no.'

A default is incredibly unlikely. The U.S. has never defaulted on its debt and it is very likely that it will take any and every step available to avoid a default.

The debt ceiling has been raised 45 times in the last 40 years, and will likely be raised again.

And even though, as mentioned, past debt ceiling crises have resulted in market volatility, their effects have been short-lived.

There is very little to indicate that the current crisis will have long-term implications for you or your finances.

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