Time is running out for a deal to avert a historic default on the nation’s debt, as Treasury Secretary Janet Yellen warns that the United States may run out of money for. Breaching the debt ceiling may seem esoteric, but financial experts warn that it could hurt Americans financially in several ways. Here’s what you should know.
What is the debt ceiling?
The debt ceiling, set by Congress, is the maximum amount the federal government can borrow to pay its debts. Raising the debt ceiling doesn’t allow for new spending, but it does allow the government to fund its previously approved obligations, which range from Social Security payments to military salaries.
Failing to raise the debt ceiling is “like going to a restaurant, looking at the menu, seeing the cost of everything, and by the time you get the check, you’re saying, ‘Never mind, I can’t pay that much.’” Jacob Channel, Chief Economist at LendingTree .
Has the US ever breached the debt ceiling?
No, although it has come close several times before, most notably in 2011, when lawmakers agreed to raise the debt limit just days before it exhausted its ability to borrow. This led the credit rating agency Standard & Poor’s tofor the first time. The stock market plummeted, with the Dow down 17% in the weeks surrounding the crisis.
“It’s hard to overstate how bad it is,” the channel said.
How would breaching the debt ceiling affect my 401(k)?
A default would shake the global financial markets, spurring many investors to sell their stocks and bonds. Prices will drop, although it is not known how severely the blow will be given that the US has never been in such a situation.
Tony Roth, chief investment officer of the Wilmington Trust, noted that “there is a significant chance of meaningful turmoil in US financial markets” if a breach occurs. “You would find the whole country would be at war, frankly, because of the turmoil it would cause in the financial markets.”
Will I still get my Social Security payments?
Social Security recipient, according to experts. With 66 million recipients, this delay is likely to create financial hardship for many, especially seniors and other Americans who rely on Social Security as their main source of income.
If the US defaults, Yellen said in April, “it is unlikely that the federal government will be able to disburse payments to millions of Americans, including our military families and seniors who depend on Social Security.”
Will federal employees get paid?
As Yellen notes, federal workers and members of the armed forces may not get paid. The United States will need to decide whatWith the money it still has available, it can choose to continue paying interest on its bonds in order to avoid a debt rating downgrade rather than pay federal payroll.
Patrick Gurley, associate professor of economics at the University of New Haven, noted in an interview with Executive Government, a publication: that covers the federal government.
What happens to Medicare and Medicaid?
Both could malfunction, potentially affecting the care of older Americans on Medicare and low-income families who depend on Medicaid. Total 158 million people are enrolled in Medicare and Medicaid – nearly half of the US population.
“Get your health care now. Don’t wait until June 1,” Sarah Rosenbaum, a professor of health law and policy at George Washington University, told Axios. “My message to the world is, don’t wait for this orthopedic surgery.”
Will it affect my credit cards?
The breach is likely to increase the broader cost of borrowing by raising interest rates, including on credit cards.
It would hurt. Credit card APRs do existreaching nearly 21%, the highest level since the Fed began tracking annual interest rates in 1994. Consumers already owe nearly up 17% from last year, which is a record.
How does a breach of the debt ceiling affect mortgage rates?
It could become more expensive to buy a home because a default would force the Treasury to pay higher interest on its bonds to persuade investors to commit — and mortgage rates and other borrowing costs tend to follow Treasury rates.
Mortgage rates could rise to 8.4% by September, up from 6.9% now, if the debt ceiling is exceeded, according to Zillow. The real estate company said that would make a mortgage payment on a typical home 22% more expensive and potentially “freeze” the market.
Will the United States fall into a recession?
Even a brief breach of the debt ceiling of a week or less is likely to tip the economy into recession, Mark Zandi, chief economist at Moody’s Analytics, said in a recent report. A short penetration, Zandi wrote, would be “enough to undermine the already fragile US economy.”
But if the breach lasts longer than that, the US could fall into a “deep recession,” in which employers cut 7.8 million jobs and the unemployment rate jumps to 8%, or nearly double its current level, Zandi predicted.
How long can the breach of the debt ceiling last?
Given the turmoil — which will affect anyone with a 401(k) or dependent on government programs — it’s likely the uproar will force the White House and Congress back to the negotiating table to find a quick fix, experts say.
“If we had a default, the breakup would be so great that the default wouldn’t last long because the pressure would be too intense to fix the situation,” said Roth of the Wilmington Trust. “It will only last two days.”
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