The Economic Impact of a Breach in the US Debt Ceiling

The United States is currently facing the possibility of breaching the debt ceiling, which has been in place since 1917. Congress needs to raise the limit every time the government gets close to it. Although it has done so nearly 80 times since 1960, the process can sometimes be accompanied by drama.

Democrats and the White House want to lift the ceiling without any conditions, while Republicans want strings attached. If a decision is not reached, the US will breach the debt ceiling on June 5.

If this happens, the effects would be negative. The Treasury Department would delay paying bills, including Medicare reimbursements to doctors and hospitals, Social Security checks, and veterans’ benefits. The delay would have ripple effects and hurt seniors who rely on Social Security to make a living.

There will be legal wrangling around whether Treasury is allowed to pick and choose which financial obligations it meets instead of just paying bills as they come due. The longer this wrangling goes on, the more it will destabilize financial markets and the economy.

The immediate worst-case scenario is that the US defaults on its debts and doesn’t make interest payments. This would be very bad as many contracts, use Treasury debt to determine payouts and prices. People wouldn’t get credit, and serious things might happen.

It is still possible to avoid this situation if an agreement is reached between the Republicans and Democrats. Many experts believe Treasury will pay bondholders, and the Federal Reserve will try to find a way to minimize the damage in the plumbing.

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