The debt ceiling drama continues

It’s once again time to check in on the US debt ceiling debacle. Spoiler alert: Joe Biden and GOP lawmakers are no closer to reaching a resolution on raising the debt ceiling after the president met with Congressional leaders yesterday.  

Catch-up: The US hit its debt ceiling—the maximum amount of debt it’s allowed to take on—in January. Since then, the Treasury has been MacGyvering ways to keep on servicing debt but has warned that come June the US runs the risk of an unprecedented default.

The White House wants to avoid this and the ensuing economic crisis that would come with it. Unfortunately for them, only Congress has the power to set the debt limit, and the majority Republican house is demanding drastic spending cuts in exchange for raising the ceiling.    

  • Speaker of the House, Republican Kevin McCarthy, already rejected one proposed solution to raise the debt ceiling through to September to allow for more discussions.

Why it matters: A default would lead to withheld pension payments, job loss, and, per Goldman Sachs, a 10% drop in economic activity in the US… but why should we care? Well, hate to break it to ya, but a default would be bad news for the entire global financial system. 

The belief that US Treasury debt is risk-free is a core tenet that underpins global finance. If this was proven false, investors could lose confidence and sell off US bonds en masse, causing widespread market panic and weakening the world’s currency (aka, the USD). 

What’s next: A lot more squabbling, for one. But since the US has never purposely defaulted, hope remains that cooler heads will prevail even if bipartisanship doesn’t.—QH