(C) Common Dreams
This story was originally published by Common Dreams and is unaltered.
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The U.S. Hit the Debt Ceiling. What Does That Mean and What Happens Now? [1]
['Alan Rappeport', 'Jim Tankersley', 'Jeanna Smialek']
Date: 2023-01-11
What happens if we actually go over that cliff?
Just approaching a breach of the debt limit can hurt the economy. In 2011, congressional Republicans and President Barack Obama engaged in a standoff over spending and debt that was resolved just in time to avoid hitting the limit. That brinkmanship rattled investors, consumers and business owners, with concrete consequences.
Stock prices plunged — and volatility in the market spiked — as lawmakers approached a debt limit breach. They did not recover for half a year. The cost of borrowing for corporations, which fluctuates with the level of risk that investors perceive in the economy, jumped substantially. That made it more expensive for companies to borrow to make new investments. Mortgage rates spiked similarly, hampering prospective home buyers. The credit agency S&P downgraded America’s credit rating for the first time.
Consumer confidence and small-business optimism both plunged during the crisis, as well.
An actual breach would be far worse, economists warn.
If the Treasury Department is unable to make payments to lenders who hold federal debt — what is known as a default — investors would demand much higher interest rates in the future to loan money to the government. It would be similar to what happens when borrowers miss credit card payments — their credit ratings go down, and the interest rate they pay often goes up.
Such a scenario would add drastically to the government’s interest payments, which the White House projects will cost the equivalent of 2.6 percent of the total American economy over the next decade, further squeezing the federal budget. It would also threaten to destabilize bond markets globally because U.S. Treasury bonds are largely seen as one of the safest investments in the world.
That spiral would most likely occur even if the government maintains its payments to bondholders but is unable to pay other bills, like salaries for federal workers.
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[1] Url:
https://www.nytimes.com/2023/01/11/us/politics/debt-ceiling-economy-congress.html
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