[June 1, 2023] We knew this day would come; we hit our debt ceiling in January. Now, while Congress hammers out a deal before we default, Erin Kennedy and Larry Roby discuss the latest headlines and break down how it will affect you and your retirement.
We remind you always to consider your overall financial picture to make a well-informed decision. Contact us at info@sfabridge.com or 615-216-1048.
Supplemental Information on the Debt Ceiling
Several consequences and implications may arise when the United States reaches its debt ceiling. Let’s explore the main points:
Government Shutdown: Hitting the debt ceiling means the U.S. Treasury Department can no longer borrow funds to cover its obligations. As a result, the government may experience a partial shutdown if it cannot meet its financial commitments. This can lead to disruptions in government services, delayed payments to contractors and suppliers, and furloughs for federal employees.
Default Risk: The debt ceiling crisis raises the risk of a potential default on the U.S. government’s debt obligations. It would be a default if the government cannot make timely interest payments or redeem maturing bonds. This scenario would have severe consequences for the U.S. economy and global financial markets, causing a loss of confidence in U.S. Treasury securities and potentially triggering a financial crisis.
The debt ceiling impasse can negatively impact the economy. It can increase borrowing costs for the government, leading to higher interest rates on mortgages, credit cards, and other consumer loans. Uncertainty surrounding the debt ceiling can dampen investor confidence, affecting stock markets and business investments.
Budgetary Constraints: Hitting the debt ceiling forces the government to operate within its existing revenue, which can be insufficient to cover all its obligations. This situation often requires the government to implement austerity measures, such as spending cuts or delayed payments, to avoid default. These measures can adversely affect government programs, defense spending, infrastructure projects, and social welfare programs.
Temporary Measures: To mitigate the impact of hitting the debt ceiling, the U.S. Treasury can employ various extraordinary measures. These measures involve reallocating funds from different accounts, suspending certain investments, or temporarily relying on cash flow adjustments to meet obligations. However, these measures only provide a limited reprieve and cannot sustain the government indefinitely.
The debt ceiling debate often becomes highly contentious. It involves negotiations between the executive branch and Congress to raise or suspend the debt limit. This can be politically charged, with debates over spending priorities, fiscal responsibility, and concessions. The uncertainty and brinkmanship surrounding the debt ceiling negotiations can further contribute to market volatility and economic uncertainty.
It is important to note that the consequences of hitting the debt ceiling can have far-reaching implications for the U.S. and global economies. While the Treasury has employed various measures to manage the situation in the past, a prolonged or mishandled debt ceiling crisis could have severe repercussions.