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Debt Ceiling EXPLAINED: When Things Hit The Ceiling, Literally, In The US

For the United States, June 1 is almost exactly what one would call a doomsday. It is the day when the country is expected to run out of money.

US News
| Written By
Deeksha Sharma

Image: AP

A disagreement between US President Joe Biden and congressional Republicans over the national debt ceiling has dangerously snowballed into an ominous threat that now looms over average working Americans, the US economy, and global stock markets at large. But how did it get so bad? Here, we take a look.

For the United States, June 1 is almost exactly what one would call a doomsday. It's the day when the deadline to raise the debt ceiling could finally come to an end, the day when the United States is expected to run out of money and be unable to pay its bills for the first time in history.

According to treasury secretary Janet Yellen, the country faces an “unprecedented economic and financial storm” as Biden scrambles to reach a consensus from a series of intense discussions with Republicans over the debt ceiling. “Well, really that’s it. We have been using extraordinary measures for several months now. And our ability to do that is running out. And we will start to run down our cash and our current projection is that in early June a day will come when we’re unable to pay our bills unless Congress raises the debt ceiling. And it’s something I strongly urge Congress to do,” Yellen said recently. 

For the US, sand appears to be quickly trickling down the hourglass. If it is unable to push up its debt limit, the government faces defaulting on its bills. This could be a domino effect, ranging from federal workers being let go of, stock markets crashing, and a full-blown recession taking over the country. 

But what is the debt ceiling? 

In layman's terms, the debt ceiling is the limit of the amount of money that the government can borrow to carry out the payments of essential services such as military salaries, Medicare, and social security. On an annual basis, the government extracts revenue through taxes and other forms of payments like customs duties to pay for its expenses.

However, it tends to spend far more than the amount it has received, thus landing in a deficit that has ranged from a whopping $400 billion to $3trillion in the past 10 years. Once the year comes to an end, the deficit pending gets added into the country's total debt.

This is when the US treasury comes into the picture. The department is responsible for issuing securities and bonds that can later be paid back with additional interest. However, the treasury can only come to the rescue so much. Once the debt limit is reached and things hit the ceiling, literally, the treasury cannot provide securities, thus bringing cash flow into the federal government to a complete halt. 

So why isn't the ceiling simply being raised? 

We wish it was that easy. To answer the question in one word- stalemate. 

Earlier in April, April Republicans passed a bill in the House that would increase the debt ceiling to $1.5 trillion on the condition of $4.8 trillion in spending cuts over a decade. Democrats refused, arguing that cuts should happen during negotiations surrounding the budget, and not the debt ceiling.

But Republicans refused to succumb to the game of chicken, given how they were able to persuade their counterparts in 2011 just 72 hours before the government defaulted. But with the years gone by, things have changed. Today, neither sides are willing to compromise, birthing a stalemate that could be a never-seen-before end of the US. “Failure to meet the government’s obligation would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen warned in a letter to Congress earlier this year, according to The Guardian.

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