Written By: Niharika Sharma
US were to default on its debt on October 18, 2021, when Treasury Secretary Janet Yellen informed that the country was reaching its debt ceiling which currently stands around $28tn. Both the Republicans and Democrats were in conflict with each other as to how to resolve the issue by playing the blame game (1). As a result, on 15 October 2021, the Congress voted for short term bill to raise debt ceiling till December giving the government some room to act. At the US Senate, the constitution requires both majority and opposition parties vote to make changes to the debt ceiling. This means that even if there are 50 Democrats at the senate, yet it still requires at least 10 Republicans to vote for the measure to pass. As the US government cannot keep increasing its debt ceiling, the Republicans agreed to extend Biden’s government request for temporary increment of the debt ceiling which will be voted again on 3 December 2021(1).
What Is Debt Ceiling?
When the government as an entity spends more than what it earns as revenue, it borrows money to support its expenditure which is called a budget deficit(1). The US government does so by borrowing through issuing of bonds, treasury bills and notes via the US Treasury. Both domestic and foreign investors make up the share of holding such instruments. These governments securities are sold to corporations, financial institutions, and other countries around the world (4). Usually, risk-averse investors buy such instruments as government issued securities are considered to be the safest asset. It is very common for the US government to increase its debt ceiling. But it is important for governments to have control on how much debt the country as it can take a big hit on the nation’s economy and implications can have serious impact all over the world. In order to pay off the debt, the government usually does so by raising its revenue through increased taxation, reducing its own spending, debt restructuring, increasing sources of revenue or by declaring defaults (4).
The US government has its debt dated back to 1970s after the revolutionary war. Under the George Bush presidentship, debt rose to high levels due to increased tax reductions and funding of wars overseas. This was continued by Obama where the national debt held by public saw an increase of 73.3% by the end of Q4 in 2016 (4). Under Trump, the national debt had gone up by 4% in the first three only (4). The pandemic hit the US economy hard as the country went into lockdowns and shutdown of government facilities as mortality rates increased as well as public debts due to high medical bills that people were not able to pay. This resulted in recession as debt amounted to 101% of the GDP at the end of Q4 2020. Since the change of government, the debt is now around 98.3% of the GDP (4).
Where Did The Money Go?
The US government in 2021 has spent on national defence($754.8B), Medicare(696.5B), health services(796.8B), social security($1.1T), commerce and housing credit(304.1B), education, training(296.6B) and mostly on income security for about $1.6 Trillion(3). Income security mostly comprised of unemployment compensation and food and nutrition assistance.
The government has earned most of its revenue through individual income taxes($2.04 T) and least through corporate taxes($371.8 B) according to the US Data Lab (2).
What Happens If The US Government Defaults?
If the US government defaults on its debt, it would be catastrophic as US is considered as unit of account and have a global impact on the rest of the world. Plunging into recession the country would raise poverty levels and would no longer be able to recover with this economic loss so easily.
How Can One Protect Oneself?
It is important to understand to keep a close eye to investments. Even though, a big nation like the US would not easily jump into depression, there are ways where one can protect oneself from such short-term recessions. Some of the ways are:
1. Liquidity: It is important to ensure cash availability which can be a big aid during tough times. A good measure is to have enough funds if one is unable to find employment for six months.
2. Insurance: Make sure to have insurance on the bank accounts which will protect during the time of economic turmoil. For instance, Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration that insures deposit insurance.
3. Real-Estate: Having real-estate income can multiply wealth faster than inflation which can help fight short term plunges in the economy
4. Investments: It is important to invest in today’s world in order to stay ahead and secure. The 8th wonder of the world is compounding which is the answer. As one invests, one learns to read the financial markets and helps in forecasting such shortcomings in the economy. This is the reason why rich got richer during the pandemic. Investing in various assets from stocks to cryptocurrency can ensure big medical payments in the US.
1. BBC News.(15 October 2021). Debt ceiling: What’s next for the US debt limit https://www.bbc.com/news/world-us-canada-58820071
2. DataLab. Federal Revenue Trends.https://datalab.usaspending.gov/americas-finance-guide/revenue/
3. DataLab. Federal Spending by Category and Agency.https://datalab.usaspending.gov/americas-finance-guide/spending/categories/
4. Probasco, Jim, J-Boyle, Michael, Rohrs-Schmitt, Kristen.(October 20,2021).The National Debt Explained.Investopedia.https://www.investopedia.com/updates/usa-national-debt/