America on the Balance Over Debt Limits – What Happens Next?

Secretary of the Treasury Janet Yellen warned congressional Republicans on Friday that failing to postpone or increase the federal debt ceiling by August 1 will result in severe financial implications.

If lawmakers do not act, Yellen said, her agency will have to take exceptional measures to keep the US from collapsing on its debt.

It Comes Down to if Republicans Will Agree to Increase the Debt Ceiling or Not

In a statement to legislative Republicans, Yellen stated that if Congress does not act to extend or add to the debt ceiling by Monday, August 2, 2021, the government will be forced to take additional exceptional steps to keep the US from falling on its commitments.

The debt limit is a threshold on how much the government can borrow. When the government spends more than what it earns, it borrows to make up the shortfall, most typically through the issuance of IOUs in the form of US government bonds.

The national government had reached its $22 trillion federal debt by the conclusion of 2020; since June 30, another $6.5 trillion had already been acquired, bringing the total national debt to $28.5 trillion.

Trump Stopped the Government from Borrowing More Money – that Expires at the End of July

The Bipartisan Budget Act of August 2019, signed by President Donald Trump and slated to expire on July 31, stopped the United States from borrowing more money. The Biden administration has yet to outline its strategy for raising the debt ceiling.

Yellen explained that raising the debt ceiling does not permit more spending; instead, it enables the government to pay planned operations expenditure. If Washington fails to raise the debt ceiling, the Treasury will be required to try to halt certain payouts (such as those to Welfare Benefits recipients, public workers, and military personnel) in order to save money.

Inability to satisfy those duties would have irreversible consequences for the US economic system and all Americans’ wellbeing. Even the fear of failing to satisfy those commitments has had negative consequences in the past, according to Yellen, such as the country’s only credit rating reduction in history in 2011.

Due to various variables, such as the difficulties of predicting the US government’s payouts four basic financial months in advance, the stay-in time of drastic action is unknown. This is also exacerbated by the greater volatility in receipts and payments due to the financial impact of the disease outbreak.

Notwithstanding the unusual move, the Congressional Budget Office (CBO) predicted that the US Federal Reserve would reach its debt ceiling by October or November. Total revenues and expenditures could change significantly from the CBO’s forecasts in the following months.

As a result, the exceptional measures may be depleted, and the Treasury may run out of funds sooner or later than that of the CBO anticipates, according to the study. However, Democrats want to spend trillions further.

Meanwhile, conservatives oppose any large-scale spending deals that aren’t particularly targeted to address current issues. GOP Sen. Mitch McConnell, the Senate Ranking Member, has stated that Republicans will not vote to raise the debt ceiling.