What’s Going on With the Debt Ceiling Deadline, and Could the U.S. Default?



Key takeaways

  • The U.S. government could be headed for another potential shutdown, if Congress can’t solve the debt ceiling issue by June 1
  • A U.S. debt default would cause a world recession and jeopardize the U.S. on the financial world stage
  • No agreement has been reached by Congress yet

We’re at another debt ceiling crisis in the U.S. government as Republicans and Democrats battle it out to find a compromise. We’re just a couple of weeks away from the deadline, and investors are worried with no agreement in sight. We’ve got the lowdown below.

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What happens if the U.S. defaults?

The U.S. government has a lot of debt and interest to pay. It’s limited on how much it can borrow, but sometimes the government reaches the point where it could run out of money to pay the bills. Sure, we’ve all been there. But if the U.S. government defaults, the financial implications are dire for the country and the world.

Even saying that might be underestimating the consequences of a U.S. debt default. The U.S. dollar is considered the gold standard, so other countries borrow trillions through U.S. Treasury bonds. There would be a huge selloff in Treasury bonds, plunging the U.S. economy into a deep recession.

Not to mention the U.S. government can print more money thanks to its cushy position in the world economy. So a default would send the country spiraling and ruin the US’ reputation as a safe economy. In short, there are literally zero benefits to the U.S. government defaulting on its debts.

It’s important to keep in mind that a government shutdown — as we’ve seen a few times in recent years — doesn’t automatically mean the U.S. government has defaulted on its debts, but it makes it a potential outcome if it goes on too long.

What’s going on with the U.S. government debt?

Obviously, everyone is looking to avoid that situation. Unfortunately, in recent years the matter has become a way for one side to extract deals and negotiations from the other side, and that’s what’s happening now: Republicans want spending cuts and the Democrats just want to get it sorted without any strings attached.

We’re looking at a June 1 deadline. The answer is simple: Congress needs to raise the debt ceiling. That way it can avoid not paying pensioners, veterans and federal workers or delaying any debt payments.

As it stands, there’s no solution to the crisis just yet — but as the deadline rapidly approaches, it wouldn’t make sense for the U.S. to lose all financial credibility and pull the economy into recession. We hope.

The bottom line

The U.S. defaulting on its debt is unthinkable because the consequences are so severe, so people shouldn’t be worried about it happening. But as the deadline approaches, the risk of a recession grows and could undo the Fed’s positive progress on dropping inflation while avoiding a financial downturn.

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