Report by Shuchi Giridhar
The US is currently going through a debt ceiling crisis. What does that mean, exactly? Let’s learn more.
What is the debt ceiling?
To understand the issue, let’s start by understanding the meaning of ‘debt ceiling’.
A debt ceiling or debt limit is the legislative (allowed by the law) limit for the amount of debt the USA’s Treasury (funds held by the US government) can incur. The debt ceiling was created under a law called the Second Liberty Bond Act of 1917.
If the debt level of the US government reaches the ceiling (the upper limit), then the Government Treasury had to acquire money by any means to pay government obligations and expenditures until the ceiling is raised again. If the Treasury is unable to do so, then the US government would default on its debt. Hence, the ceiling was increased whenever the USA reached the limit. The ceiling has been raised and suspended several times. This lowered the credit rating of the United States of America and increased its debt.
What will happen if it doesn’t get resolved?
If the debt ceiling isn’t raised by June 1st, the US government will default on its debt. This will cause the USA to not be able to pay its bills. This would mean that the government would not be able to pay government workers, interest on the national debt, and benefits to citizens. To avoid a default, US President Joe Biden will meet with the Republican leader Kevin McCarthy to discuss raising the debt ceiling. It would be best for the US if the debt ceilings would be raised two weeks before the deadline.
Both the political parties need to agree to raise the debt ceiling. This time, the parties are not able to come to an agreement.
How will this default affect the global economy?
The default of the US will cause turmoil worldwide. Investors that find the US government bond safe might want to withdraw their money, but the US Government does not have any money.
This could lead to an increase in interest rates, which will make it expensive for businesses to borrow money.
At this time, an agreement has not been reached.