Folks, it’s time to talk about the US debt ceiling. We can already sense your eyelids drooping, but—stick with us here—this is important stuff.
What happened: The US has officially reached the maximum amount of debt it’s allowed to take on (the “debt ceiling”). The US Treasury can hold tide things over until about June, through a mix of special measures, before the US runs the risk of defaulting.
Why it’s happening? The US has a pretty strange system in which Congress can limit how much debt the government is allowed to take on. In the past, the US has inevitably reached that limit, and Congress has raised it—this has happened 78 times since 1960.
So they’ll just raise it for the 79th time, right? Not necessarily. Congress hasn’t been this polarized since the Civil War, and Republicans, who control the House, are saying they won’t approve any debt ceiling increase unless the White House promises major spending cuts.
- The debt ceiling spat was one reason it recently took 15 rounds of voting to elect Kevin McCarthy as the new Republican speaker of the House—some members of his party wanted confirmation that he would play hardball in such negotiations.
Why it matters: If an agreement is not reached and the US defaults on its debt, the world economy will pay the price. US assets are viewed as some of the safest investments in the world, serving as the bedrock for the global financial system. A default would cause investors and markets to lose confidence in the US, drastically shaking the entire system.