How does America's debt ceiling affect financial markets?

How does America’s debt ceiling affect financial markets?

Nov 20 • Forex Trading Articles • 369 Views • Comments Off on How does America’s debt ceiling affect financial markets?

At the start of 2023, the US hit its debt ceiling, so what happens next? We look at what the debt ceiling does and how it is raised.

What is the debt ceiling?

The debt ceiling also called the statutory debt limit, is the maximum amount of debt that the United States Treasury is allowed to borrow with its bond issuances.

How does the debt ceiling work?

As the government’s debt and spending levels are measured against the debt ceiling, it can determine whether that level is within the limits set by the legislature.

At the time, the cap stood at $31.4 trillion. It was last extended in December 2021 by $2.5 trillion, indicating it would last until January 19th, 2023.

Since the ceiling has been reached, the Treasury Department must take steps to prevent defaults on government loans until the ceiling is raised again.

Several of these measures include suspending new investments and amending the Thrift Savings Plan – which invests in non-marketable securities with a daily maturity date for federal employees. Treasury may also temporarily cease reinvestment and prioritize existing payments.

The first benefits usually given to veterans are social security, health care coverage, and other benefits for military personnel.

Why does the debt ceiling matter?

Due to the ongoing disagreement between Congress and the government, some fear raising the debt ceiling may be delayed. If a new limit is not negotiated, the US could default on its loans.

Defaulting on US loans would have devastating and wide-ranging effects. This would be the first time in history that the US government has defaulted.

According to experts, the US Treasury will only be able to meet its current debt obligations for a few months due to the extraordinary measures it is taking to meet its obligations.

What does raising the debt ceiling mean?

Increased debt ceilings allow the government to take on more loans, but they do not allow new spending commitments, only existing ones.

Can Congress raise the national debt ceiling?

Congress can raise the debt ceiling, but Republicans will likely use it as political leverage to demand deep budget cuts due to their control of Congress.

It’s not unusual for Democrats and Republicans to get into a standoff. It also happened during President Obama’s term. However, negotiations must happen quickly since the X date is fast approaching.

Congress isn’t the only one who could complicate matters. Biden said he will raise the debt limit “without conditions,” and the administration won’t agree to negotiate. 

How does the debt ceiling affect financial markets?

A failure to raise the debt ceiling could lead to the US defaulting on its loans, which would have severe implications for the domestic and global economy.

In the US, growth is projected to shrink by up to 5% annually, and nearly 3 million jobs could be lost, according to the Third Way think-tank. Meanwhile, borrowing costs would rise as the US dollar weakened. As a result, mortgage and credit card interest rates would rise, and retirement pots would shrink for the average American.

It would also harm the bond market. Since the world’s largest economy backs US debt securities, they are regarded as some of the most secure investments. However, should the government default, it will lose its reputation.

Due to the reliance of other economies on the US, the situation would have knock-on effects on other markets, including Forex and indices.

How many times has the debt ceiling been raised?

Congress has raised the debt limit 78 times since 1960. Congress has never failed to raise the debt limit when called upon, though it is always used as a political bargaining tool.

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