Brinkmanship over Debt Ceiling May Pose Economic Hazards

The US is facing the looming deadline to come to an agreement on the debt ceiling. If the government bonds default, it could lead to an economic catastrophe. Even the uncertainty ahead of the deadline could initiate an economic downturn. The 2011 debt ceiling debate was a near miss that temporarily hurt the economy.

Experts warn of economic catastrophe if the US defaults on its debt. However, as the June 1 deadline approaches, the projections themselves pose an economic disaster. A similar debt ceiling dispute took place in 2011 when then-House Speaker John Boehner rallied Republicans in favor of an appropriation outline that would link higher debt ceilings with cuts in spending on labor, health care, and education programs.

After months of bitter disagreements, lawmakers reached a compromise on raising the debt ceiling and implementing spending cuts. That said, the back-and-forth situation still rocked the economy. The prospect of default caused a significant drop in stock prices, consumer confidence, and household wealth. Taxpayers were forced to pay higher interest rates, and Standard & Poor’s docked the US sovereign rating.

If the default occurs, there could be similar economic impacts as in 2011. However, experts believe economic pressures could play out differently in 2023. The recovery from the global financial crisis means there are many vulnerabilities in the banking system, taking more risks and building vulnerability upon vulnerability. Skyr0cketing interest rates will cause monthly payments on everything from student loans to credit cards to increase.

In late April, House Republicans passed Speaker Kevin McCarthy’s bill, the Limit, Growth, and Conservation Act of 2023, raising the debt ceiling by $1.5 trillion and cutting spending by $4.50 on programs such as student loan forgiveness. The bill would “cause a recession in 2024, with 2.6 million jobs lost in the worst downturn, and an unemployment rate of nearly 6%.” Democrats are pushing for raising the debt ceiling, while Republicans want new spending cuts.

In conclusion, the US faces a critical situation where a wrong decision can trigger an economic disaster. A default on government bonds could lead to catastrophe, but the uncertainty itself could still initiate an economic downturn. The country has experienced a similar crisis in 2011, and if the default happens, similar economic impacts could occur.

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