Debt default vs. government shutdown: What to know

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-You've probably heard about the fight over the debt ceiling. -There's still no deal on the debt ceiling. -Economic experts warn there would be dire financial consequences, -$31 trillion before a June 1st deadline. -And you might remember government shutdowns. -Well, Congress is in, unfortunately, a familiar position as it works to avoid another government shutdown. -The countdown is on this morning for lawmakers to come to an agreement on a government funding package before Friday's deadline. -But a default on the national debt and a government shutdown aren't the same thing. Here's how the two scenarios are different. -The big difference with going over the debt ceiling is the government literally does not have the cash to pay the bills, any bills, not just the part that's annually appropriated, but Social Security benefits, Medicare benefits, veterans' benefits, and interest on the substantial federal debt. -America has actually never experienced a default before. That's why it's always such a big deal. Members of Congress, as much as they may try to politicize lifting the debt ceiling, it really has never gotten to the point of default because the consequences would be immense. -To understand what causes a government shutdown, first you have to understand appropriations. Appropriation bills provide the financial resources necessary for the government to carry out its various functions and services. When the government's appropriations bill expires and Congress has not passed a new budget, a shutdown is triggered. -So that is something that is really felt immediately in D.C., in capital cities. But it takes some time for the American public to feel it. The only way the public really feels it is if they have plans to go to a national park. They wouldn't be able to do that. You'll see trash being piled up in public parks. They also may not receive mail if it really goes on for a very long time. There are economic consequences to a government shutdown, but usually the government opens back up at some point and you can remake all of those losses over time. -The debt ceiling is a bit different. Congress may agree to spend more in special circumstances, like in the midst of a war, recession, or global pandemic. When the government spends more than what it earns, a deficit occurs. Because tax revenue alone can't pay for the deficit, the Department of Treasury sells bonds to make up the difference, paying interest to those who buy the bonds. The debt ceiling is a cap by Congress on the value of those bonds, or how much the government can borrow to pay for what Congress has already approved. The Department of Treasury has already reached the current debt limit of $31.4 trillion in January of this year, but has taken what they call extraordinary measures to avoid default. They warned if an agreement can't be made by early June, the government will run out of money. -We still estimate the Treasury will likely no longer be able to satisfy all of the government's obligations if Congress has not acted to address the debt limit by early June. -If we reach what's known as the X date, the day where the Treasury doesn't have enough money in its checking account to pay every bill that comes in that day, somebody is not going to get paid. It might be the people who own government bonds, it might be federal employees, it might be people who are expecting a Social Security check. -U.S. Treasury bonds are often used as a benchmark for other interest rates and financial instruments, such as mortgages and corporate bonds, because they're backed by the full faith and credit of the U.S. government. If the interest payments on those bonds aren't paid, potential repercussions include a downgrade of the United States credit rating, increased borrowing costs for businesses and homeowners alike, and a drop off in consumer confidence that could shock the U.S. financial market and tip the economy into recession. -We have been able to, in effect, live beyond our means, to spend money that we had to borrow, only because a lot of people, some in the United States, some big insurance companies, some mutual funds, but a lot overseas, have been willing to lend us the money, and they're willing to lend us the money because they think that if you have money to park somewhere, the absolute safest place to put it is in a U.S. Treasury bond. If we don't raise the debt ceiling, if one person doesn't get their interest on time, we will lose that reputation forever. -Even though the debt ceiling has been raised 78 times since 1960, as politics become more polarized, the debt ceiling negotiations have been used as a bargaining chip for Democrats and Republicans to advance other agenda items. -When one side starts to think the other guy is winning the messaging war, that's when somebody's going to blink. The hope is that that'll happen before we get to the point of crisis. But it often -- even when we do this, it often ends up happening at the very last minute.
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Channel: Washington Post
Views: 6,238
Rating: undefined out of 5
Keywords: News, The Washington Post, WaPo Video, Washington Post Video, Washington Post YouTube, a:politics, deal, debt ceiling, democrats, government shutdown, joe biden, kevin mccarthy, republicans, s:Politics, t:Other
Id: xz71NFiXYWs
Channel Id: undefined
Length: 4min 54sec (294 seconds)
Published: Thu May 18 2023
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