Lawmakers have less than three weeks to raise the debt limit or risk a first default, which would trigger a large market sell-off and put the brakes on everything from government payments to the ability to borrow.
“It is imperative that Congress quickly address the debt ceiling,” Treasury Secretary Janet Yellen said in a speech to the Senate Banking Committee.
Failure to act could trigger economic catastrophe, Yellen also said.
“Nearly 50 million seniors could stop receiving Social Security checks for some time. Troops may not be paid. Millions of families who depend on the monthly child tax credit could experience delays.
“In a few days, millions of Americans could be strapped for cash.”
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Federal debt is the amount of money the government currently owes for expenses such as Social Security, Medicare, military salaries, and tax refunds.
The debt limit allows the government to finance these existing obligations.
“Raising the debt ceiling does not authorize additional spending of taxpayer money. Instead, when we raise the debt ceiling, we are effectively agreeing to increase the country’s credit card balances. “said Yellen.
In the worst-case scenario, the federal government would default, at least temporarily, on some of its obligations, including Social Security payments, veteran benefits, and federal worker wages.
Social Security, created in 1935, has never missed the payment of a benefit. However, checks could be delayed for weeks or more if Congress fails to raise or suspend the debt ceiling, the National Committee for the Preservation of Social Security and Insurance recently warned. sickness.
Social Security is self-funded, but the program draws on its trust funds, which include treasury bonds, to pay out benefits.
Potential downgrades in US credit ratings would hit Treasuries. Demand for US Treasury bonds could fall if they are no longer seen as a reliable and safe-haven investment and bondholders would demand significantly higher interest rates to offset the increased risk.
This, in turn, would also increase other borrowing costs, including credit cards, auto loans, and mortgage rates (which are typically indexed to the yields on U.S. Treasuries).
At the very least, the fear of default could shake the stock market and send shockwaves throughout the economy, said Mark Hamrick, senior economic analyst at Bankrate.com.
“If you go back to a decade ago, there was an immediate liquidation in the financial markets – it hit investors hard and ran the risk of a cascading financial crisis,” he said.
In 2011, a deadlock over the debt ceiling in Congress brought the country closer to default before lawmakers finally reached a deal, but not without a deterioration in the country’s credit rating and significant volatility. of the market.
Between July and October of the same year, the S&P 500 sank more than 18%.
This time around, lenders could start tightening their standards up front to reduce their exposure – or risk – in a controversial battle, said Yiming Ma, assistant professor of finance at Columbia University Business School.
“Uncertainty alone can have an impact on borrowing conditions and the availability of loans,” she said.
“If I was someone about to take out a loan, I would look at the terms now,” Ma added. “In the last few days there could be a frenzy.”
“We know from previous deadlocks around debt limits that waiting until the last minute can seriously damage business and consumer confidence, increase borrowing costs for taxpayers, and have a negative impact on the credit rating of the United States for years to come, ”Yellen wrote in a statement. letter to House Speaker Nancy Pelosi, Tuesday.
Congress and the White House have changed the debt ceiling nearly 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling fell to nearly $ 3 trillion from less than $ 1,000 billion. During the 1990s, it doubled to nearly $ 6 trillion, and doubled again in the 2000s to over $ 12 trillion.
In 2019, Congress voted to suspend the debt ceiling until July 31, 2021. Now the Treasury is using temporary “emergency measures” to buy more time so the government can continue to pay its debt obligations. duty bearers, ex-combatants and social security beneficiaries.
“We now estimate that the Treasury will likely exhaust its extraordinary measures if Congress has not acted to increase or suspend the debt limit by October 18,” Yellen said in the letter to Pelosi.
“At this point, we would expect the treasury to end up with very limited resources that would quickly run out.”
CNBC’s Lorie Konish contributed to this report.
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