The U.S. debt ceiling: Consequences of default?
The resounding concern I’ve recently heard from clients, and one that is shared by the general public, is what would happen if Congress failed to address our debt ceiling issue?
For simplification, think of an increase in the debt limit as similar to an increase in your credit card limit as a means to pay your bills. But if the debt limit isn’t increased, that means our government can’t borrow money to pay its bills, therefore potentially defaulting on its outstanding debt. To be clear, this is not a new issue. In fact, Congress has increased the debt ceiling 89 times since 1959.
Although it has not historically become an issue, unresolved debt ceilings could cause many problems domestically as well as internationally. We’ve heard the threats of increased market volatility and temporary suspension of government programs and benefits. But on a larger scale, missed debt payments would impact all who hold federal debt. The public — including businesses, banks, insurance companies, pension funds, mutual funds, foreign government, foreign investors and the Federal Reserve — own about 78% of the federal debt. The remaining 22% is owed by the federal government to another part within itself, including Social Security, Medicare, military retirement fund, etc.
As the world’s reserve currency since 1944, the Fed’s monetary policy actions are crucial in steering local and global economies and financial markets. The U.S. Treasury market is the largest debt market in the world, serves as the backbone of the financial system, and is even treated as the equivalent of cash because of the indemnity of the government’s creditworthiness. At risk is the nation’s global financial reputation and world’s confidence in the fundamental role the U.S. plays in the global economy. The dollar’s central role in world trade could also be undermined by a debt default.
With such high stakes, it is no wonder our Congress has resolved the issue the past 89 times it has surfaced. At the time of this writing, this issue is unresolved, so the question becomes, how soon will we resolve it for the 90th time and what will be the consequences?
Wendy Bennett is a senior financial adviser at Bennett Associates Wealth Management in Butler.
