People pass the front of the New York Stock Exchange in New York, on March 22. Brinkmanship in Washington over raising the U.S. debt ceiling has begun to raise worries in parts of the financial markets. Peter Morgan/AP hide caption
People pass the front of the New York Stock Exchange in New York, on March 22. Brinkmanship in Washington over raising the U.S. debt ceiling has begun to raise worries in parts of the financial markets.
The federal government is perilously close to being unable to make payments on the country's debt. It is up to Congress to vote to increase the nation's borrowing cap, known as the debt limit. But House Speaker Kevin McCarthy, R-Calif., is in a standoff with President Biden over Republican demands to tie the debt limit to spending caps and other policy demands.
Treasury Secretary Janet Yellen has warned that the country could run out of borrowing authority by June 1, leaving negotiators little time to reach an agreement.
Biden recently met with McCarthy, House Democratic Leader Hakeem Jeffries, D-N.Y., Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Minority Leader Mitch McConnell, R-Ky., to discuss a path forward. The group failed to reach a deal, but staff level talks are ongoing in an effort to avoid default.
Here are nine questions you may be asking about the debt ceiling and the fight over it.
What is the debt ceiling?
The "debt ceiling" or "debt limit" is a cap on how much debt the federal government is allowed to accumulate. Congress is constitutionally required to authorize the issuance of debt. Doing so then allows the government borrow to meet its existing legal obligations like Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments.
"It used to be that every time you did a Treasury auction where you borrowed, Congress would pass a new law just for that one auction," said Jason Furman, a top economic adviser to former President Barack Obama and an economics professor at Harvard.
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"In 1917, the United States needed to borrow a lot of money for World War I," he said. "So in order to simplify that process and make it easier, Congress shifted to a new system where they said, you can borrow up to this amount of money and then come back to us and we'll raise it."
Congress has increased or suspended the debt limit 78 times since 1960, according to the Treasury Department.
How do experts know when the government has really run out of funds?
Economists look at how much the government is expected to bring in through tax payments, when those payments are expected to arrive in Treasury accounts and scheduled debt payments to determine a timeframe, known as an X-Date for when the debt authority might run out.
However, the Treasury Department has access to a few tools, known as extraordinary measures, to avoid default. Those measures include moving investments and deploying accounting tools to shift funds around.
The federal government technically hit the debt limit in January and extraordinary measures have kept payments flowing since then. Experts cannot pinpoint the exact date when funds will run out but they can identify a general range which is expected to fall sometime in early June or possibly as late as July or August.
What the debt ceiling standoff could mean for your retirement plans
Why is there a fight over it?
Debt has generally been an unpopular concept in American politics.
Every vote a lawmaker casts is part of that person's political record and many lawmakers do not want to be seen as signing off on more federal borrowing or spending.
Lawmakers also like to tack extraneous priorities onto bills that are seen as must-pass legislation. That makes the debt limit a prime target for political fights.
Speaker of the House Kevin McCarthy of Calif., left, and Senate Majority Leader Chuck Schumer of N.Y., right, listen as President Biden before an Oval Office meeting on the debt limit on May 9. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended. Evan Vucci/AP hide caption
Speaker of the House Kevin McCarthy of Calif., left, and Senate Majority Leader Chuck Schumer of N.Y., right, listen as President Biden before an Oval Office meeting on the debt limit on May 9. Senate Minority Leader Mitch McConnell of Kentucky and House Minority Leader Hakeem Jeffries of New York also attended.
"Everybody uses [bills to increase] the debt ceiling for their favorite policies," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget. "The real problem here is that you now have people actually talking about defaulting."
In the past, votes to increase the debt limit were relatively quiet, non-controversial affairs. That changed in 2011 when the country came dangerously close to default.
Mark Zandi, an analyst at Moody's Analytics, said there have been political battles over the debt before but none were as dangerous or consequential as the 2011 fight.
"It wasn't clear up until the very end that lawmakers were going to figure out a way to sign on the dotted line and increase the limit," Zandi said. "The stock market at one point I think was down intraday almost 20%. That's a pretty large market swoon."
At the time, Republican House Speaker John Boehner, R-Ohio, was in a standoff with Obama over spending. Republicans wanted deep spending cuts and caps on how much federal spending could grow after the cuts were enacted.
Obama insisted Congress raise the debt limit without any extraneous policies --known as a clean increase.
Congress eventually reached a deal to increase the debt limit along with caps on future spending but not before the credit rating agency Standard & Poor's downgraded the nation's debt for the first time ever.
Many economists say the situation today is strikingly similar to the political fight in 2011 and there are serious concerns that the country could default.
What could happen if it's not raised?
The Treasury Department would be unable to make payments when they are due. Missing a payment of any kind or size would be considered a default.
The fight over the debt ceiling could sink the economy. This is how we got here
Some Republicans have suggested choosing which debts to pay, a system called payment prioritization. Congress would have to pass a law to make that possible, which is politically very unlikely. Most experts say it might also be impossible to execute from a practical standpoint and the idea is not being seriously considered as a solution at this time.
Has the U.S. ever failed to make these debt payments?
And that is part of why the federal government is able to easily sell share Treasury bonds to investors across the globe and why the U.S. dollar is one of the most trusted currencies.
"Treasuries are the debt vehicle that are most trusted in the entire world to the point where even if there is an economic crisis that originated in the U.S., people come and buy treasuries because they trust them," MacGuineas said. "They trust the U.S. they trust the fact that they will get paid if that is called into question, because we actually do start to default and we don't pay the interest that is due. We will never be able to regain that most trusted role in the same capacity we had before"
Would capping or cutting spending now resolve the problem?
No, the debt limit is related to money that has been spent as a result of laws Congress already passed.
"As a mathematical consequence of the laws Congress already passed, you have to borrow a certain amount," Furman said. "This borrowing isn't some unilateral thing that President Biden wants to do in order to do his favorite projects. It is in order to accomplish what Congress told him to accomplish."
In fact, some of the debt being accumulated is the result of laws passed under former presidents, including Donald Trump.
Spending caps and other changes included in a bill passed by House Republicans are separate policies intended to address future debt accumulation, not the current need to increase the debt limit.
What else could be affected by a default?
A U.S. default could cause a huge ripple of negative consequences throughout the global financial system. Any hit to the country's credit rating could do long-term harm to the value of U.S. treasuries and make the country a less appealing investment.
"I am truly concerned there is an actual chance of default and that is so dangerous and such a sign that the U.S. is not able to govern itself in a way that is functioning," MacGuineas said. "We should all be worried both about the debt ceiling itself, but also about what it says about our politics."
Zandi warned that the consequences could go beyond just investment and lending rates.
"Don't worry about your stock portfolio, worry about your job," he said. "Because a lot of jobs are going to be lost. Unemployment is going to be a lot higher. Is the economy struggling already trying to avoid recession because of high inflation, high interest rates? This will certainly push us and, you know, it's going to be about layoffs. Stock portfolios will be the least of people's worries."
Furman said it could be worse than the 2008 financial crisis when the fall of Lehman Brothers Bank triggered a global financial crisis.
"It could be worse than Lehman Brothers, where everyone basically demands their money back because they don't believe the collateral anymore," Furman said. "And you have the equivalent of a run on the global financial system."
Is default the same thing as a shutdown?
No. A government shutdown occurs when Congress fails to authorize annual spending bills before the end of the fiscal year on Sept. 30.
The U.S. could run out of cash to pay its bills by June 1, Yellen warns Congress
The two issues sometimes become linked because lawmakers have occasionally extended the debt limit to intentionally align with the end of the fiscal year in order to force broader spending discussions alongside the debt authorization.
Are there other ways this problem could be fixed, aside from just increasing the debt limit?
Most experts agree the current debt limit process isn't working. MacGuineas of the Committee for a Responsible Federal Budget said Congress should be reassessing debt and spending priorities but the debt limit mechanism does not actually force them to make choices.
"The debt ceiling is a terrible way to try to impose fiscal responsibility," she said. "It doesn't make sense. It says after you vote to borrow a lot of money then you will then vote whether to actually make good on those bills. That's a dumb approach."
Instead, she suggested a system where Congress agrees to increase the debt limit when they pass legislation.
Others economists have suggested abolishing the debt limit entirely.
Other less popular proposals include minting a $1 trillion platinum coin to cover the debt or raising it so high that the next debate will be stalled for years or decades.
What is the deadline to raise the debt ceiling? ›
When is the deadline for raising the debt ceiling? Treasury Secretary Janet Yellen has said that the U.S. government could become unable to pay all of its bills on time as soon as June 1 if Congress doesn't first raise the debt limit.What does the 14th Amendment have to do with the debt ceiling? ›
Clause 4 of the 14th Amendment states that the “validity of the public debt of the United States … shall not be questioned”. By invoking this provision, Biden could order the US Treasury to keep issuing bonds and keep paying the government's bills.What happens if U.S. defaults on debt 2023? ›
Individuals and businesses would have trouble getting loans, and Zillow estimates that a prolonged government default would push mortgage rates up to about 8.4% from the 6.4% interest rate on a 30-year fixed-rate mortgage that we see today, per Freddie Mac.What is the best explanation of the debt ceiling? ›
The debt ceiling is the amount of money the U.S. is authorized to borrow to pay its bills. The U.S. runs a budget deficit, meaning its revenue isn't enough to cover spending. The government borrows money to make up the difference. Congress regularly suspends or raises the debt limit so the U.S. can borrow more.How likely is the US to default? ›
There's just a 2% possibility the U.S. government will default on its loans, according to analysts at Deutsche Bank, despite days of stalled-out negotiations.What happens if the US defaults on debt? ›
So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.What happens when the government hits the 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 does the 14th Amendment say about debt simplified? ›
Section 4 Public Debt
But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.Will the US ever have to pay off its debt? ›
In modern history, the U.S. has never defaulted on its debt. The debt ceiling is the self-imposed limit on how much debt Congress allows the federal government to have. If Congress does not raise or suspend the debt ceiling, the U.S. could default on its debt, which would also impact financial markets and the economy.
Does debt go away after 7 years in USA? ›
A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.How can I protect my money if US defaults on debt? ›
That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses. Since a debt default would likely send interest rates soaring, any credit card debt you're saddled with may soon cost you more.Who owns most of US debt? ›
Domestic Holders of Federal Debt
The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.
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. Offered in a wide range of maturities.Why does the US have so much debt? ›
America's debt has risen massively since the beginning of the 21st century, as "politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers, and emergency measures to help the nation endure two debilitating recessions," writes Jim ...Does the US owe most of its debt to itself? ›
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.What happens if you default on your mortgage in the USA? ›
Falling behind on payments or missing payments, though, can lead to what's called mortgage default. Once this happens, your house can go into foreclosure, and you may lose your home altogether.How much is the US in debt to itself? ›
Nearly all of that debt – about $31.38 trillion – is subject to the statutory debt limit, leaving just $25 million in unused borrowing capacity. For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022.Will the stock market crash if the US defaults on its debt? ›
The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts. But for those with diversified portfolios who aren't nearing retirement, investment experts advise that you stay the course.Which country has highest debt? ›
- Sri Lanka. ...
- Portugal. Debt to GDP Ratio: 114% ...
- Cuba. Debt to GDP Ratio: 117% ...
- Bahrain. Debt to GDP Ratio: 120% ...
- Zambia. Debt to GDP Ratio: 123% ...
- Suriname. Debt to GDP Ratio: 124% ...
- Bhutan. Debt to GDP Ratio: 125% ...
- United States. Debt to GDP Ratio: 129%
Which country has defaulted the most? ›
Spain holds the dubious record for defaults, having done so six times with the last occurrence in the 1870s. Greece has defaulted five times since achieving independence in the 1820s, or half its modern history. But not since then.How much debt is the US in 2023? ›
The deficit is projected to fall to $1,154 billion billion in 2023, and debt held by the public is projected to grow to $26,033 billion, but fall as a percent of GDP, to 101.8 percent. After 2023, the deficit is projected to roughly stabilize at around 5 percent as a percent of GDP.What happens if we don't raise the 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 are the 3 main provisions of the 14th Amendment? ›
14th Amendment - Citizenship Rights, Equal Protection, Apportionment, Civil War Debt. Constitution Center.Is the debt ceiling constitutional? ›
Congress has maintained some form of a debt limit, without constitutional controversy, since the dawn of the republic. According to widely held legal principles, its existence creates no conflict with the Constitution, and the Supreme Court would almost certainly reject any attempt to argue otherwise.What does the Constitution say about all previous debt? ›
Fourteenth Amendment, Section 4: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.What actions are forbidden by the 14th Amendment? ›
No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.What is an example of a due process violation? ›
A violation of due process is anything that includes depriving a person of “life, liberty, or property, without due process of law." An example of such a violation would be law enforcement searching an individual's property without a warrant.Am I protected under the 14th Amendment? ›
Passed by the Senate on June 8, 1866, and ratified two years later, on July 9, 1868, the Fourteenth Amendment granted citizenship to all persons "born or naturalized in the United States," including formerly enslaved people, and provided all citizens with “equal protection under the laws,” extending the provisions of ...When was the last time the U.S. was not 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 you don't pay your debt in America? ›
If you stop making your required payments on general consumer debts (like a line of credit, overdraft or credit card), your creditors will generally charge you a fee for defaulting on (missing) payments and start reporting those defaults on your credit history.Who does the U.S. owe so much debt to? ›
Which countries hold the most US debt? 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 is the 11 word phrase to stop debt collectors? ›
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.Do credit cards forgive debt? ›
Credit cards are another example of a type of debt that generally doesn't have forgiveness options. Credit card debt forgiveness is unlikely as credit card issuers tend to expect you to repay the money you borrow, and if you don't repay that money, your debt can end up in collections.What not to say to debt collectors? ›
- Don't Admit the Debt. Even if you think you recognize the debt, don't say anything. ...
- Don't provide bank account information or other personal information. ...
- Document any agreements you reach with the debt collector.
If a debt collector has a court judgment, then it may be able to garnish your bank account or wages. Certain debts owed to the government may also result in garnishment, even without a judgment.Can you ask creditors to reduce debt? ›
It is possible to negotiate directly with creditors and settle your debt for less than you owe, but you may want the help of a professional. A quick counseling session from a certified credit counselor can help you discover your options and choose the right path forward.What countries owe America money? ›
- Japan. Japan held $1.08 trillion in Treasury securities as of November 2022, beating out China as the largest foreign holder of U.S. debt. ...
- China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
- The United Kingdom. ...
- Belgium. ...
Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders. Although China's holdings have represented just under 20 percent of foreign-owned U.S. debt in the past several years, this percentage only comprises between 5 and 7 percent of total U.S. debt.How much do we owe China? ›
|Rank||Country||U.S. Treasury Holdings|
|3||🇬🇧 United Kingdom||$655B|
Which country has no debt? ›
|Characteristic||National debt in relation to GDP|
|Hong Kong SAR||4.26%|
U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.What happens if US defaults on debt? ›
So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.Why does the US owe so much money to China? ›
The US owes so much money to China because of the large trade and investment deficit the US currently has with China. This deficit is the result of a combination of factors, including rising wages and technology costs in the US, slow growth in the US economy, and US policies that favor the import of goods from China.How much credit card debt does the average American have? ›
The average U.S. household has $6,473 in credit card debt
Many Americans use credit cards to pay for purchases, and it turns out many have outstanding account balances. According to data from Experian, the average American's credit card balance in the third quarter of 2021 was $5,221.
|Type of debt||Total owed by an average U.S. household with this debt||Total owed in the U.S.|
|Credit cards (revolving)||$7,876||$488.66 billion|
|Auto loans||$29,107||$1.56 trillion|
|Student loans||$59,461||$1.6 trillion|
In 1917, during World War I, Congress created the debt ceiling with the Second Liberty Bond Act of 1917, which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling.
The debt-ceiling standoff has renewed debate over the Constitution's 14th Amendment. Some lawyers argue it lets President Biden unilaterally pay the nation's debts without heeding Republicans' demands; others say that idea fundamentally misreads the Constitution.Is the debt ceiling in the Constitution? ›
The 14th Amendment of the United States Constitution states that "the validity of the public debt of the United States...shall not be questioned." Many scholars argue that this clause means that it is unconstitutional for the United States to default on its debt.What did the 14th Amendment declare Confederate debts to be? ›
Section 4 of the Fourteenth Amendment renders all public debt accumulated by Congress to be legitimate, and determined that the state and federal governments are under no obligation to compensate for the lost financial value of the freed slaves or the Confederacy's war debts.
Who owns US debt? ›
Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.Has the US hit the debt ceiling? ›
The debt ceiling refers to a law that caps the total amount of federal debt allowed to be outstanding. The U.S. hit that limit in January, but the Treasury Department says it has been using workarounds, or what it calls “extraordinary measures,” to keep the government paying its bills on time.What is my 7th Amendment right? ›
In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.What is the 31st Amendment right? ›
No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.What is the 12th Amendment rule? ›
The new electoral process was first used for the 1804 election. Each presidential election since has been conducted under the terms of the Twelfth Amendment. The Twelfth Amendment stipulates that each elector must cast distinct votes for president and vice president, instead of two votes for president.Who does the government 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 does the Constitution say about debt? ›
Fourteenth Amendment, Section 4: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.Who does the 6th Amendment protect? ›
The Sixth Amendment guarantees criminal defendants nine different rights, including the right to a speedy and public trial by an impartial jury consisting of jurors from the state and district in which the crime was alleged to have been committed.What are the 4 main points of the 14th Amendment? ›
14th Amendment - Citizenship Rights, Equal Protection, Apportionment, Civil War Debt.