Q&A: Understanding the Debt Ceiling

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One of the more contentious points being discussed in Congress right now is the debt ceiling. The House will vote on a bill Wednesday that would suspend it, but Republicans in the Senate have said they will reject the legislation because they do not support a debt limit increase or suspension.

For many, the concept of the debt ceiling and what it means for our everyday lives may be confusing. Brian Marks, a senior lecturer in the Economics and Business Analytics Department at the University of New Haven, sat down with NBC Connecticut's Dan Corcoran to break it down.

Dan: "So a lot of talk about this, and it's pretty confusing. So can you give us just the basics? Why do we continually have to raise the debt ceiling? And what happens if we don't?"

Marks: "OK, thank you, Dan, for having me. Well, very simply, the way to look at the debt ceiling is the U.S. government has made commitments, financial obligations, and we have to pay those obligations, we've borrowed money, so we can fulfill many of our obligations on a going-forward basis. The U.S. government per law is only allowed to borrow so much. That's the debt ceiling. So what we've done is we put things on our credit card, and now we have to pay it. If we don't raise the debt ceiling, we will not be paying our preexisting obligations. And if we don't pay those preexisting obligations, it creates a great deal of problems for the U.S. government and the economy, in general. And we can unpack that, if you wish.

Dan: "So right now, our debt ceiling, I believe, is $28.4 trillion. And many in Congress are looking to raise that limit. So another question I and probably a lot of people at home have is how all that money is going to be paid back and who it's owed to?

Marks: "OK, so as far as who the money is owed to, it's several people. One is institutions and other countries. When the Treasury Department needs to borrow money, it floats treasury bills and bonds. And people borrow, lend us the U.S. government money with the promise that we will pay it. That's been part of our governmental system from the beginning of the United States of America. In fact, Alexander Hamilton wrote a report on credit, which explained the importance of why the U.S. government needs to fulfill its obligations to other countries who we borrow from, as well as to the people who we've committed to pay, whether it's contractors, Social Security, Medicaid, Medicare payments, and the various programs that have been supporting the economy in light of this pandemic. So that's where the money's going. That's who work, who expect to be paid. And as well as those who are lending us the money. There the bondholders, if we stop paying one or the other groups, we're in essence in default."

Dan: "Now as for real-life implications of missing this debt ceiling deadline, how and where would we see that in our daily lives?"

Marks: "Right. And so some people say, well, that's at the federal level, what's the big deal? But think of all the programs that are involved in support. We are coming out of a recession, we're recovering from a pandemic. It is clear based on information out of the Fed that, yes, the economy has been improving, unemployment is getting better at about 5.2%. But let's remember pre-pandemic, we were at 3.5%. So what could that mean? There have been, there was an estimate by Moody's that if we were to actually default, the ramifications could mean a loss of 6 million jobs, leading to an unemployment rate of 9%. How does that happen? Well, if we're not paying our contractors, if we're not paying our federal employees, they're not spending money. They don't have the money to spend because they're not receiving it.

"Interest rates, the cost of borrowing for the U.S. government will increase because of you're going to increase risk, meaning a probability of not paying let alone no default. Interest rates will go up on a going-forward basis. If interest rates go up, that means, for the ordinary person who needs to borrow money themselves will find an increase in interest rates, because the Treasury rates are used as sort of a benchmark for all other rates.

"The other thing that could happen here is the implications on a going-forward basis. What does this mean for President Biden's agenda, his program, because we're already putting him down our ability to pay our preexisting obligations. What does it mean for our future obligations, the programs that are associated with that agenda? So as Secretary Yellen said yesterday in her testimony before a congressional committee, this could be catastrophic. Our politicians today are playing a game of brinksmanship. And the consequences are the U.S. economy and the ordinary everyday citizens of the United States and potentially global ramifications as well."

The deadline is quickly approaching, midnight tomorrow.

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