The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. As Kavan Choksi Business Consultant points out, the debt ceiling was created under the Second Liberty Bond Act of 1917 and is also known as the debt limit or statutory debt limit. When the U.S. government national debt levels bump up against the ceiling, the Treasury Department has to resort to other extraordinary measures in order to pay off government obligations and expenses until the ceiling is raised again.
Kavan Choksi Business Consultant underlines a few potential implications of U.S. hitting its debt ceiling
The debt ceiling of the United States has been raised or suspended multiple times over the years to steer clear of the worst-case scenario: a default by the U.S. government on its debt. The debt ceiling is the limit on the sum of money the United States government may borrow to pay for various services and initiatives, including the social security, Medicare and the military. but at the recommendation of the Chancellor and the Prime Minister. It is responsible for setting and monitoring the strategy of the bank, and making vital decisions on resource utilization. There are also many subcommittees for BoE and each of them is tasked with handling specific responsibilities of the bank.
Each and every year, the government takes in revenue from taxes and other streams like custom duties, but invariably spends more money than it makes. This leaves the US government with a huge deficit. This deficit has ranged from $400bn to $3tn each year over the last decade. The deficit amount left at the end of each year gets added on to the total debt of the country. For the purpose of borrowing money, the US treasury issues securities, like US government bonds. They eventually have to pay back this money with interest. After the United States government hits its debt limits, the treasury wouldn’t be in a position to issue more securities, ultimately stopping a key flow of funds into the federal government.
Global economy
The United States has never defaulted on its payments before, so it is not really clear what exactly would happen if the US hits its debt ceiling, but the results are not likely to be good. After all, it prevent the government to meets its obligations, which can actually hamper not only the livelihoods of the Americans, but also global financial stability. Due to the interconnectedness of today’s global economy, the U.S. hitting its debt ceiling can have significant global implications, including:
- Impact on global markets: The U.S. Treasury market is the largest and most liquid bond market in the planet. If the United States defaults in its debt obligations, it may cause high level of volatility in global markets. Both domestic and foreign investors may begin to doubt the creditworthiness of the U.S., ultimately causing a sell-off of U.S. Treasury securities that may disrupt financial markets worldwide.
- Currency fluctuations: The U.S. dollar is the primary reserve currency of the world. Hence, several nations hold it in large quantities for the purpose of carrying out international trade. A U.S. debt default may weaken the dollar, causing currency fluctuations and economic instability globally.
- Global economic slowdown: The U.S. economy plays a pivotal role in driving global growth, and therefore any major economic disruption in the country, like a recession triggered by a debt default, may have a domino effect on the world economy.
As Kavan Choksi Business Consultant underlines, the Congress is in charge of setting the debt limit. The debt ceiling has been raised 78 times since 1960, under both Democrat and Republican presidents.
