Lawmakers agreed to a short-term increase of the U.S. debt ceiling to avoid a first-ever default, but everyday Americans are not entirely out of the woods.
A debt limit extension into December took pressure off both parties to reach a compromise by Oct. 18, when the Treasury Department warned the U.S. would exhaust its emergency efforts to pay the government’s bills.
However, “when we talk about kicking this can out to December, it continues to be a burden on consumers,” said Mark Hamrick, senior economic analyst at Bankrate.com.
The stopgap merely “continues the uncertainty,” he said. “I think it would be inappropriate to characterize this as a successful resolution.”
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The federal debt is the amount of money the government currently owes for spending on payments such as Social Security, Medicare, military salaries and tax refunds.
The debt limit allows the government to finance those existing obligations.
“Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars,” Treasury Secretary Janet Yellen has said. “Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance.”
Failing to act could spark an economic catastrophe, Yellen also said.
“Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays.
“In a matter of days, millions of Americans could be strapped for cash.”
Without a resolution, the federal government would default, at least temporarily, on some of its obligations, including those Social Security payments, veteran’s benefits and salaries for federal workers.
Social Security, which was created in 1935, has never missed a benefit payment. However, checks could be delayed for weeks, or even longer, if Congress fails to either raise or suspend the debt limit, the National Committee to Preserve Social Security and Medicare recently warned.
Social Security is self-funded yet the program is drawing down from its trust funds, which include U.S. Department of the Treasury bonds, to pay benefits.
Potential downgrades of U.S. credit ratings would hammer Treasurys. Demand for U.S. Treasury bonds could sink if they are no longer considered a reliable, safe-haven investment, and bondholders would demand dramatically higher interest rates to compensate for the increased risk.
That, in turn, would also send other borrowing costs higher, including credit cards, car loans and mortgage rates (which generally are pegged to yields on U.S. Treasury notes).
Just the uncertainty can impact borrowing terms and borrowing availability.
Yiming Ma
assistant finance professor at Columbia University Business School
Just the fear of default could rattle the stock market and send shock waves throughout the economy, according to Bankrate’s Hamrick.
“If you go back to a decade ago, there was an immediate selloff in the financial markets — it hit investors hard and runs the risk of a cascading financial crisis,” he said.
In 2011, a debt limit standoff in Congress brought the country very close to a default before lawmakers finally struck a deal, but not without a downgrade of the country’s credit rating and significant market volatility.
Between July and October of that year, the S&P 500 sank more than 18%.
This time, lenders may start tightening their standards to reduce their exposure — or risk — during a contentious battle in the weeks ahead, said Yiming Ma, an assistant finance professor at Columbia University Business School.
“Just the uncertainty can impact borrowing terms and borrowing availability,” she said.
“If I was someone about to take out a loan, I would look at the terms now,” Ma added.
“We know from previous debt limit impasses that waiting until the last minute can cause serious harm to business and consumer confidence, raise borrowing costs for taxpayers, and negatively impact the credit rating of the United States for years to come,” Yellen wrote in a letter to House Speaker Nancy Pelosi last month.
Congress and the White House have changed the debt ceiling almost 100 times since the end of World War II, according to the Committee for a Responsible Federal Budget. In the 1980s, the debt ceiling increased to nearly $3 trillion from less than $1 trillion. During the 1990s, it doubled to nearly $6 trillion, and doubled again in the 2000s to over $12 trillion.
In 2019, Congress voted to suspend the debt limit until July 31, 2021. Now, the Treasury is using temporary “emergency measures” to buy more time so the government can keep paying its obligations to bondholders, veterans and Social Security recipients.
CNBC’s Lorie Konish contributed to this report.
