Economists warn of potential debt crisis

On Jan. 13, U.S. Secretary of the Treasury and economist Janet Yellen notified Congress that the American statutory debt limit would be hit in a two-page letter addressed to Republican House Speaker Kevin McCarthy. For the average American, hitting this limit would bring about many issues, such as delayed payments for Social Security and Medicare recipients, stock plunges, and a general decrease in wealth. Yellen promised “certain extraordinary measures” to curb the U.S. from possibly defaulting on its obligations, which has never happened in its history. 

According to the Congressional Budget Office (CBO), a statutory debt limit or “debt ceiling” is defined as “the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies.” Defaulting on this debt means the government has officially run out of money and can no longer fully pay its obligations or provide specific services such as Medicare or tax refunds.

Furthermore, U.S. credit ratings will critically decrease due to stock drops, weakened currency, and a loss of faith in financial markets. Congress created the debt ceiling through the Second Liberty Bond Act in 1917, raised permanently and temporarily on multiple occasions since 1960.

The Department of the Treasury outlined and planned to carry out two extraordinary measures later in January. Yellen cited redeeming existing and suspending new investments of the Civil Service Retirement and Disability Fund (CSRDF) and reinvestment in the Government Securities Investment Fund (G-Fund) of the Federal Employees Retirement System Thrift Savings Plan. The CSRDF provides defined benefits to retired and disabled Federal employees covered by the Civil Service Retirement System. 

President Joe Biden and House Speaker Kevin McCarthy met in January to discuss ways to prevent a default but could not come to any particular agreement. McCarthy promised several hardline members in his party to include spending cuts if the ceiling were to be raised, meaning a “clean” bill no longer seems viable. The divided government has made discussions, even within parties, rather complicated. Thomas S. Wootton High School sophomore Justin Kim says, “I think divided government can really slow our country’s growth and capacity for responding to hard times. Hopefully, a decision can be made soon.”

Yellen was unable to predict the longevity of such measures but claims it is “unlikely” that efforts will be exhausted before summer begins. The CBO approximates that money will eventually run dry between July and September of this year.

Thomas S. Wootton teacher Mr. Winter says, “I think the debt limit will be raised. Republicans are posturing and playing to the base, but the consequences of a default would be too terrible and they’d be blamed. Biden’s administration is refusing to negotiate, which is an interesting strategy. They’re asking the Republicans for specific cuts they’d make to spending, and this is always unpopular.”

Economists warn against major disruptions–and possible financial crises–that could emerge to change the economic landscape of many markets. Wall Street investors have also become worried over the debt limit’s effect on stock market gains over the summer. The value of equities, stocks, and even the U.S. dollar is unsafe. Although the crisis seems contained within America, a default will be disastrous to the world.

Article Written by Allison Zhang of Thomas S. Wootton High School

Image courtesy of Creative Commons