 The economic consequences of a large-scale, intentional default are unknown, but predictions range from bad to catastrophic.


What is the Debt Ceiling?


The debt ceiling is the legal limit on the total amount of federal debt the government can accrue. The limit applies to almost all federal debt, including the roughly $24.5 tril- lion of debt held by the public and the roughly $6.9 trillion the government owes itself as a result of borrowing from various government accounts, like the Social Security and Medicare trust funds. As a result, the debt continues to rise due to both annual budget deficits financed by borrowing from the public and from trust fund surpluses, which are in- vested in Treasury bills with the promise to be repaid later with interest.


What is the current amount of debt the United States has?  Since the end of World War II, Congress and the President


have modified the debt ceiling more than 100 times ac- cording to the Congressional Rese arch Service.


 During the 1980s, the debt ceiling was increased from less than $1 trillion to nearly $3 trillion.


 Over the course of the 1990s, it was doubled to nearly $6 trillion, and in the 2000s it was again doubled to over $12 trillion.


 The Budget Control Act of 2011 automatically raised the debt ceiling by $900 billion and gave the President au- thority to increase the limit by an additional $1.2 trillion (for a total of $2.1 trillion) to $16.39 trillion.


 Lawmakers have suspended the debt limit, rather than raising it by a specific dollar amount, seven times since February 2013.


 The debt limit was increased — not suspended — twice in 2021, mostly recently in a December 2021 bill that formally increased the limit to $31.381 trillion.


What are the real consequences of a default? Once the government hits the debt ceiling and exhausts


all available extraordinary measures, it is no longer allowed to issue debt and soon after will run out of cash-on-hand. At that point, given annual deficits, incoming receipts would be insufficient to pay millions of daily obligations as they come due. Therefore, the federal government would have to default on many of its obligations at least temporarily, from Social Security payments and salaries for federal civilian employees, and the military to veterans’ benefits and utility bills, among others.


The debt limit debates of recent years raised interest rates. Higher interest rates would undoubtedly make solv- ing the long-term fiscal problems harder, not easier, and have ramifications across many sectors of the economy. Net interest payments are already expected to explode over the next 10 years and beyond. Because government bond rates are used, contractually, to determine other interest rates, other interest rates would rise as well.


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More generally, Treasuries might never again be considered a safe haven. This could generate a variety of additional is- sues. Banks might classify Treasury holdings as non-perform- ing assets. Some Money Market Mutual Funds would “break the buck” — i.e., fall in nominal value — which could create havoc, as they did in 2008. Some or all federal entities could lose their AAA borrowing status.


No matter how long the debate in Washington takes, a de- fault, or even the perceived threat of one, could have serious negative economic implications. Even the threat of default during a standoff increases borrowing costs. The Government Accountability Office (GAO) estimated that the 2011 debt ceil- ing standoff raised borrowing costs by a total of $1.3 billion in Fiscal Year (FY) 2011, and the 2013 debt limit impasse led to additional costs over a one-year period of between $38 million and more than $70 million.


The 118th Congress was barely organized when the debt ceiling was hit in mid-January. How Congress ultimately de- termines the path forward will be instructive as the new slim majority will have to balance the issues raised above with the political realities of the GOP’s conservative wing. Getting to a final product will set the tone and be an example for how the 118th Congress operates on the other major legislative priori- ties that will come as the year progresses. 


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