The US Debt Ceiling Crisis Explained!

Update to article: 8 October 2021:

The US Senate has voted to temporarily raise the nation's debt limit, avoiding a historic default that experts say would have devastated the economy. Senators agreed to increase the limit by $480bn (£352bn), which will cover the US until early December.

The bill was approved in a 50-48 vote, following weeks of partisan fighting.

The breakthrough came less than two weeks before the US was set to be unable to borrow money or pay off loans for the first time ever.

The bill now must be approved by the House of Representatives and will then be sent to President Joe Biden to be signed into law.

The vote in the upper house of Congress came after Republican Senate leader Mitch McConnell offered his support for a short-term extension. Senate Republicans have previously said that raising the debt limit is the "sole responsibility" of Democrats because they hold power in the White House and both chambers of Congress.

Original article: 7 October 2021:

US lawmakers are once again locked in a dangerous game of brinkmanship over lifting the debt ceiling. Treasury Secretary Janet Yellen warned Congress last week that the country will reach its ceiling by 18 October, which (at the time of writing this article) is only 10 days away.

Republicans are daring Democrats to resolve the conflict alone, but Democrats say they are being reckless. The showdown has prompted fears of a default on the national debt. A default is unlikely and has never happened in US history but would have catastrophic implications for the US and the global economy.

What is the debt ceiling?
The US government spends more money than it collects in taxes, so it borrows to make up for the shortfall.

Borrowing is done via the US Treasury, through the issuing of bonds. US government bonds are seen as among the world's safest and most reliable investments.

In 1939, Congress established an aggregate limit or "ceiling" on how much debt the government can accumulate.

The ceiling has been lifted on more than 100 occasions to allow the government to borrow more.

As the country has become more bitterly partisan, lawmakers have used the debt ceiling vote as leverage against other issues.

In a 2013 standoff, the last time the US was in serious danger of going over a "debt cliff", Republicans put up a blockade over the spending plans of Barack Obama.

Lawmakers typically back down at the eleventh hour.

Who owns US debt?
US Citizens, probably. The Social Security Trust Fund buys a lot, along with pension funds and institutional investors. Creditors also include foreign nations, like China and Japan, although they do not own anywhere near a majority of the US debt.

What happens if the debt ceiling is not raised?
Treasury Secretary Janet Yellen has been warning Congress for months about the consequences of not raising the limit. The US technically reached its limit in August, when a two-year reprieve Congress passed in 2019 expired. The Treasury Department has been moving things around to cover costs since then.

For the first time ever, sometime in the second half of October, the US would default on its debts - which currently stand at around $28tn (£21tn).

Such an event would cause delays to every single government programme and affect federal funding for individual states.

Default may also trigger a spike in interest rates and ruin America's creditworthiness, making the US a more expensive place to live and damaging the economy. It would also bring turmoil to the stock market.

Not raising - or temporarily suspending - the debt ceiling also threatens the health of the global economy.

Investors around the world may sell off US assets and become less trusting of the US dollar.

The International Monetary Fund (IMF) has called for an end to Washington's "counterproductive brinkmanship" over the debt ceiling. It also suggested the cap should be replaced with an alternative financial mechanism.

Why is there a standoff over the debt ceiling?
There are 50 Democrats in the Senate, but unless they end the filibuster, it will take the agreement of 10 Republicans to get a vote on the debt ceiling.

How has this worked in the past?
In the past 50 years, according to the Treasury Department, Congress has acted 78 times to raise the debt limit. That includes 49 times under Republican presidents and 29 times under Democratic presidents.

The last time lawmakers voted to raise the debt limit, it was a bipartisan affair. They raised the limit for a time period -- two years -- instead of a dollar amount, as in many previous votes.

What are Democrats saying?
On Monday, President Joe Biden condemned what he called "hypocritical, dangerous and disgraceful" Republican opposition. Mr Biden said it amounts to "playing Russian Roulette with the economy".

Democrats have pointed out that raising the debt ceiling is about paying off existing obligations rather than paying for new ones, and that Mr Biden's policies have only contributed to 3% of existing debts.

They also note that, during Mr Biden's predecessor Donald Trump's term, they joined with Republicans to raise the debt ceiling three times.

What are Republicans saying?
Senate Republicans have said raising the debt limit is the "sole responsibility" of Democrats because they hold power in the White House and both chambers of Congress.

Minority Leader Mitch McConnell tweeted last month that his party "will not facilitate another reckless, partisan taxing and spending spree".

Two attempts to vote on the debt limit have already failed in the Senate and the deadline set out by Ms Yellen is fast approaching.

How might this get resolved?
Amid this week's negotiations, Senator McConnell has proposed two possible options.

He has said Republicans may be willing to come along with Democrats on raising the debt ceiling temporarily through December.

Alternatively, he offered an expedited reconciliation process, in which Republicans would agree to limit floor debate and amendments in order to shepherd the legislation through the Senate quicker.

Democratic leaders had previously indicated that using the tool of reconciliation would not be palatable to them, as it would create dual tracks of legislation - to raise the debt limit and to separately pass the Democrats' social spending bill.

But they have delayed a third attempt to bring up the debt ceiling measure through regular order in the Senate so that the party can contemplate Mr McConnell's offer.

Should you be worried?
Failure to raise the debt ceiling in time could halt payments that millions of Americans rely on, including pay checks to federal workers, Medicare benefits, military salaries, tax refunds, Social Security checks and payments to federal contractors.

It could cause job losses, a shutdown of tens of billions in Covid-19 economic recovery aid still set to be delivered, a near-freeze in credit markets and gross domestic product taking a tangible hit that could last for multiple quarters.

A Goldman Sachs report has estimated the US Treasury may need to halt more than 40% of expected payments and financial aid to US households.

The Pentagon released a statement on Wednesday expressing concern that service members too may not be paid in full or on time.

The American people may see the value of their retirement accounts shrink, interest rates go up and their mortgage and car payments increase.

President Biden recently said: "Defaulting on the debt would lead to a self-inflicted wound that takes our economy over a cliff and risks jobs and retirement savings, Social Security benefits, salaries for service members, benefits for veterans, and so much more."