The potential economic consequences of different debt ceiling scenarios | KE | The White House (2023)


New analysis from both the Congressional Budget Office and the US Treasury Department suggests the United States is fast approaching the date when the government will no longer be able to pay its bills, known as "Date X." History is clear that even coming close to exceeding the US debt ceiling could cause significant disruptions in financial markets that would hit the financial conditions of households and businesses. Real-time data, shown below, indicates that markets are already pricing in political gains related to the federal government's default through higher risk premiums.

An actual breach of the US debt ceiling would likely cause severe damage to the US economy. Analysis by CEA and outside researchers shows that if the U.S. government defaulted on its obligations—whether to creditors, contractors or citizens—the economy would quickly turn upside down, with the magnitude of the damage depending on how long the breach lasted. . Prolonged bankruptcy would likely cause severe damage to the economy, with job growth reversed from the current rate of huge gains to losses running into the millions.

(Video) White House to GOP: 'Stop the Brinksmanship' on Debt Ceiling

The potential economic consequences of different debt ceiling scenarios | KE | The White House (1)

In other words, our government defaulting on the national debt could undo the historic economic benefits of the president taking office: an unemployment rate near a 50-year low, the creation of 12.6 million jobs, and high consumer spending. spending that fuels a steady, reliable growth engine, supported by clearing from a strong labor market and healthy household balance sheets.

Because the government would be unable to take countercyclical measures in a recession caused by the break, there would be limited policy options to mitigate the impact on households and businesses. The ability of households and businesses, especially small businesses, to borrow through the private sector to offset this financial pain would also be compromised. The risks of default would send soaring, including those financial instruments used by households and businesses: government bonds, mortgages and credit card interest rates.

Possible consequences of approaching the debt ceiling

There is no historical precedent for the US government to pass the X date and breach its debt ceiling without Congress raising or suspending the statutory limit on the federal debt. Nevertheless, there is broad consensus among economists that such an event would cause an entirely avoidable economic disaster.

(Video) White House weighing debt ceiling fallback options

For example, Brookings Institution analysts Wendy Edelberg and Louise Sheiner recentlyhe arguedthat "worsening expectations of a potential default would make significant disruptions in financial markets increasingly likely" and that "such disruptions in financial markets would likely be accompanied by falling stock prices, loss of consumer and business confidence, and contraction of access to private credit markets'.

In fact, we've already seen signs of significant market pressure related to debt ceiling tensions. Yields on Treasury bills maturing around date X have risen significantly, directly increasing the cost of borrowing to the government and consequently the cost to the taxpayer. Figure 1 below shows this. Since mid-April, short-term Treasury yields have risen nearly 1 percentage point around the expected X date, or about 20%.

The potential economic consequences of different debt ceiling scenarios | KE | The White House (2)

The cost of insuring US debt has also risen significantly and is now at an all-time high amid heightened concerns about a US default. In fact, credit default swap (CDS) spreads—the premiums that must be paid to insure US debt—began to widen dramatically in April, as shown in Figure 2 below.

(Video) White House holds press briefing amid ongoing debt ceiling negotiations with GOP | full video

The potential economic consequences of different debt ceiling scenarios | KE | The White House (3)

The closer the U.S. approaches the debt ceiling, the more we expect these indicators of market stress to worsen, leading to increased volatility in equity and corporate bond markets and hampering the ability of companies to finance themselves and make productive investments necessary to expand the current growth.

Short-term bankruptcy risks

If we breach the debt ceiling, the cost to the economy is likely to be felt soon. Mark Zandi, chief economist at Moody's Analytics;was foreseenthat even a short-lived default would trigger a “crisis characterized by rising interest rates and falling stock prices. Short-term funding markets, which are essential to the flow of credit that helps finance the economy's day-to-day operations, are also likely to close." Immediately following a default, Fitch ratingsthe reportthat "the US rating will move to 'RD' (Restricted Default) [and] affected Treasuries will be rated 'D' until default is restored."

AccordingMoody'sEven a brief breach of the debt limit could lead to a drop in real GDP, nearly 2 million lost jobs and an increase in the unemployment rate to nearly 5 percent from the current level of 3.5 percent. Moody's also notes that even a brief breach of the debt limit could lead to permanently higher interest costs: "If government bonds were no longer viewed as safe by global investors, future generations of Americans would pay a heavy financial price." An analysis by Brookings found that the loss of the Treasury market's unparalleled safety and liquidity due to a default could translate into more750 billion dollarsto higher federal borrowing costs over the next decade. Peterson Instituteeconomistshave argued that lower demand for government bonds would weaken the dollar's role in the global economy: "This weakening of official dollar markets would likely increase the volatility of the dollar's value against other currencies and reduce liquidity, prompting investors to reduce their dollar reserves in any form."

(Video) White House briefing as debt ceiling talks continue

Risks of prolonged bankruptcy

In case of long-term non-payment, the cost would be even higher. A CEA simulation of the effect of a protracted bankruptcy (Figure 3) shows an immediate, sharp recession on the order of the Great Depression.[1]In the third quarter of 2023, the first full quarter of the simulated debt ceiling breach, the stock market plunges 45%, leading to a hit to retirement accounts. Meanwhile, consumer and business confidence is taking a serious hit, leading to a decline in consumption and investment. Unemployment will rise by 5 percentage points as consumers spend less and companies lay off workers. Unlike the Great Recession and the COVID recession, the government cannot help consumers and businesses. As the breach continues, the economy is slowly recovering and unemployment is still 3 percentage points higher at the end of 2023.

The potential economic consequences of different debt ceiling scenarios | KE | The White House (4)

A recent analysis by Moody's, using a different macroeconomic model, reached a similar conclusion. They predict that with a net increase in the debt ceiling, job growth will continue in the coming quarters, adding 900,000 jobs. But under a long-term standard scenario, nearly 8 million jobs would be lost, an extremely large difference of similar magnitude to our models.

Without the ability to spend money on countercyclical measures such as extended unemployment insurance, federal and state governments would be paralyzed in responding to this turmoil and unable to protect households from the effects. Nor could households borrow through the private sector, as interest rates on the financial instruments used by households and businesses - government bonds, mortgages and credit card rates - soar due to the risks of an uncertain future.

(Video) What Happens if the U.S. Debt Ceiling Is Hit? | WSJ

While policymakers so far in our nation's long history have avoided causing such damage to the US and even the global economy, nearly every analysis we've seen shows that bankruptcy leads to a deep, immediate recession. Economists may not agree on much, but when it comes to the magnitude of the risks involved in meeting or exceeding the debt ceiling, we share this deeply troubling consensus.

[1] The CEA simulation was done using FRB/US assuming adverse shocks to consumer and business confidence similar to those experienced during the Great Recession, higher interest rate premiums and government spending cuts of 20-30%. Given the current high level of inflation, the Taylor rule-regulated federal funds rate has been slow to respond to the financial disaster.


What happens if the government hits its debt ceiling? ›

Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.

What is significant about the debt ceiling and how does it relate to government spending quizlet? ›

The legal limit set by Congress on the total amount that the U.S. Treasury can borrow. If the level of federal debt hits the debt ceiling, the government cannot legally borrow additional funds until Congress raises the debt ceiling.

What are the negative impacts of raising debt ceiling? ›

According to Moody's, even a short debt limit breach could lead to a decline in real GDP, nearly 2 million lost jobs, and an increase in the unemployment rate to nearly 5 percent from its current level of 3.5 percent.

What does the debt ceiling deal include? ›

The bill caps non-defense spending — which funds areas like public education and transportation — in fiscal 2024, then increases it by 1% in 2025. The deal suspends the debt limit of $31.4 trillion through Jan. 1, 2025.

Who owns the most US debt? ›

The Federal Government Has Borrowed Trillions, But Who Owns All that Debt? At the end of 2022, the nation's gross debt had reached nearly $31.4 trillion. Of that amount, about $24.5 trillion, or 78 percent, was debt held by the public — representing cash borrowed from domestic and foreign investors.

Is the US going to hit the debt ceiling? ›

On January 19, 2023, the United States hit its debt ceiling, leading to a debt-ceiling crisis, part of an ongoing political debate within Congress about federal government spending and the national debt that the U.S. government accrues.

How does the federal debt and deficit impact our economy? ›

This gap between income and spending is subsequently closed by government borrowing, increasing the national debt. An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more.

What is the debt ceiling and why does it matter? ›

Meaning, there's only a certain amount of money the government can borrow before a limit, set by Congress, kicks in and the country can't take on anymore debt. In order to keep taking on debt, Congress will have to raise the limit.

Why does the US keep raising the debt ceiling? ›

The Treasury Department must find other ways to pay expenses when the debt ceiling is reached; otherwise, there is a risk that the U.S. will default on its debt. The debt ceiling has been raised or suspended several times to avoid the risk of default.

What are the negative effects of government debt? ›

High and rising deficits and debt can lead to persistently high inflation, rising interest rates, slower economic growth, increased interest payments, reduced fiscal space, greater geopolitical risk, and growing generational imbalances. Fortunately, none of these consequences are inevitable.

What are the negative effects of debt? ›

There's a strong link between debt and poor mental health. People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too. This is especially true if the stigma of debt is keeping you from asking for help.

What negative effects does debt have on society? ›

Fewer Economic Opportunities for Americans.

If high levels of debt crowd out private investments in capital goods, workers would have less to use in their jobs, which would translate to lower productivity and, therefore, lower wages.

Does China have more debt than the US? ›

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

Who owes the US the most money? ›

Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

What happens if America defaults on debt? ›

If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets.

Has the US ever not been in debt? ›

As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt. Jackson and his followers believed that freedom from debt was the linchpin in establishing a free republic.

What happens if America defaults? ›

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: U.S. economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current ...

How does debt hurt the economy? ›

The national debt also impacts the economy because if it gets too high, consumer and business confidence in the economy may dwindle, which could lead to turmoil in the financial markets and higher interest rates.

How can we solve the debt crisis? ›

10 practical steps for debt solution
  1. Work out a budget and deal with priority debts.
  2. Consolidate or refinance loans.
  3. Get help with late-paying customers.
  4. Gain better control over your cashflow.
  5. Reduce unnecessary spending.
  6. Boost your revenue.
  7. Engage your staff and seek their input.

Why is America in so much debt? ›

Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.

Who is affected by debt ceiling? ›

Veterans, seniors and government employees: These are just some of the people who stand to be impacted if Congress fails to raise the debt ceiling. Treasury Secretary Janet Yellen warns that without additional borrowing authority, the U.S. could run short of cash to pay its bills as early as June 1.

Who does the US government borrow money from? ›

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.

Why can't the US make more money to get out of debt? ›

The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.

When was the last US debt ceiling crisis? ›

In 2011, the U.S. reached a crisis point of near default on public debt. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs.

What happens if US debt increases? ›

Consequences of National Debt

Rising debt imposes higher interest costs, especially when interest rates rise. The CBO expects the U.S. government's net interest costs to triple over the next decade, reaching $1.2 trillion annually by 2032.

What are 3 examples of bad debt? ›

Bad Debt Examples
  • Credit Card Debt. Owing money on your credit card is one of the most common types of bad debt. ...
  • Auto Loans. Buying a car might seem like a worthwhile purchase, but auto loans are considered bad debt. ...
  • Personal Loans. ...
  • Payday Loans. ...
  • Loan Shark Deals.

What are the consequences of debt 3 reasons? ›

To start with, here are nine problems debt can cause in your life.
  • Debt Encourages You to Spend More Than You Can Afford. ...
  • Debt Costs Money. ...
  • Debt Borrows From Your Future Income. ...
  • High-Interest Debt Causes You to Pay More Than the Item Cost. ...
  • Debt Keeps You from Reaching Your Financial Goals.
May 29, 2022

What happens if the government can't pay its debt? ›

In the event of a prolonged standoff, the government would be forced to slash spending by $350 billion, sending a “cataclysmic” ripple effect through the economy, and undermining the confidence of consumers, financial markets, and businesses alike, according to Zandi's analysis.

What happens if government doesn't raise debt ceiling? ›

If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. The economic effects of such an unprecedented event would surely be negative.

What would happen if the government defaults on its debt? ›

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: US economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current ...

Who does the US owe debt to? ›

The US government owes trillions of dollars in debt to foreign entities, including governments, central banks, companies, and individual investors. This debt includes US Treasury bonds and other securities, which are popular as they are considered safe investments.

What should I do if the US defaults? ›

How you can prepare if US defaults on its debt
  1. Military families should keep extra cash. ...
  2. Expect volatility in bonds. ...
  3. Stick with high-quality investments. ...
  4. Don't over invest, despite temptation.
7 days ago

Why can't the government print more money to pay off debt? ›

The bottom line. Printing more money is a non-starter because it'd break our economy. “It would take care of the debt but at a price that's far too high to pay,” Snaith says.

Who is unable to pay his debt? ›

'A person who is unable to pay his/her debt is called a 'bankrupt.

What events are causing the US to go into debt? ›

Notable recent events triggering large spikes in the debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic.

Why is U.S. debt so high? ›

Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the 2020 COVID-19 pandemic -- the latter two prompting sweeping stimulus measures from Congress that cost trillions of dollars.

How much debt is the US in 2023? ›

At the end of FY 2023 federal debt is “guesstimated” to amount to $32.69 trillion. Thus far, on 2023-05-25, the federal debt is $31.47 trillion. See Coronavirus Update page. Click for federal debt from 1960 to present.

What happens if the US economy defaults? ›

GDP would plunge 4.6%, costing 7.8 million jobs. Stock prices would collapse, wiping $10 trillion off household wealth, and borrowing costs would spike. A deep recession in the United States, caused by a prolonged breach or a US default, would sink the global economy too.

What are the odds of the US debt default? ›

The Odds of US Going Past Default Date Are 25% and Rising, JPMorgan Says.

How much is the US in debt? ›

When the government spends more than it earns, it has a budget deficit and must issue debt in the form of Treasury securities. The U.S. has run a deficit for the last 20 years, substantially increasing the national debt. In fact, according to the Department of the Treasury, the current debt is $31.4 trillion.

Who owes the United States money? ›

Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.

Which country has most debt? ›

Japan - Debt: 221.32% of GDP

Japan's debt-to-GDP ratio is the highest in the world due to a prolonged period of economic stagnation and demographic challenges.


1. Senator Whitehouse discusses the debt ceiling fight
2. CNA Explains: What is the US debt ceiling and what will happen if the limit is not raised?
3. Negotiators race against the clock to raise the debt ceiling, avoid potential default
(ABC News)
4. White House pressed on debt ceiling as default deadline looms
(Fox News)
5. Congress should raise debt ceiling for the long term, White House economic adviser says
(PBS NewsHour)
6. Critical negotiations remain on debt ceiling after second White House meeting
(CBS News)


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