. US Fails To Raise The Debt Ceiling, Several Potential Consequences

US Fails To Raise The Debt Ceiling, Several Potential Consequences

US Fails To Raise The Debt Ceiling, Several Potential Consequences

23 May 2023

What Could Happen If the US Fails to Raise the Debt Ceiling?

  • The President of the United States, Joe Biden, and Republicans in Congress are engaged in urgent discussions to avoid a damaging default on the US debt. The Treasury has recently warned that this default could occur as early as June 1.
  • President Biden has emphasized that a default would have catastrophic consequences and is urging Republicans to agree to a “clean” increase in the borrowing limits, known as the debt ceiling, before the deadline.
  • Republicans, on the other hand, are insisting on an agreement from Democrats to commit to reducing future spending in order to support an extension of the nation’s borrowing authority.
  • So, what would happen if the US fails to raise the debt ceiling? Let’s take a look:
  • Financial markets: If the Treasury is unable to meet all its financial obligations, experts predict that US stock markets would likely experience a sharp but temporary decline. Interest rates, especially Treasury yields and mortgage rates, would also rise significantly. This would lead to higher borrowing costs for consumers and businesses.

Impact on the economy: 

Households and businesses that don’t receive federal payments owed to them would likely reduce their spending due to the loss of income. This, in turn, could negatively affect consumer confidence and harm the overall economy.

Short-term shocks: The negative effects on financial markets and the economy are expected to be short-lived. Politicians are likely to respond promptly and forcefully to any significant market reaction. Experts believe that once a deal is reached, the markets would bounce back, and the impact on the Gross Domestic Product (GDP) would not be significant.

In summary, failing to raise the debt ceiling would initially cause disruptions in financial markets, with stocks falling and interest rates rising. This would result in higher borrowing costs for individuals and businesses, potentially leading to reduced spending and a decline in consumer confidence. However, these effects are expected to be temporary, as politicians would likely take swift action to address the situation and stabilize the markets.