Arcade Herald

What happens if the government defaults?


METRO Creative Image

News organizations have been abuzz recently with the looming June 1 deadline to raise the national debt limit. 

According to a letter written by Treasury Secretary Janet Yellen to House and Senate leaders earlier this month, the government’s obligations to pay its bills may not be met as soon as June 1 if the debt limit is not raised or suspended. If the government does not have the funds to pay its financial obligations, then it will enter into default. In fact, Congress has raised the debt ceiling 78 times since 1960 to avoid defaulting.

The last time the nation reached the debt ceiling was in 2011, however, the debt limit was raised at that time. Never in U.S. history has a government default taken place.

The current government debt limit is $31.38 trillion, and that limit was reached in January of this year. The government has been taking “extraordinary measures” to keep paying its bills since January, and now those coffers are drying up as well.

The government remains at a standstill as House Republicans claim they will not support raising the debt limit yet again unless they see government spending cuts. No deal has yet been reached.

According to Forbes, if the U.S. defaults on its debt, it would “wreak havoc on the financial markets and likely send the economy into a recession.”

NPR states that “On Wall Street, everybody acknowledges a debt default would be devastating for markets and the economy, and most investors believe lawmakers will eventually clinch a deal as they have in the past.”

CBS News reported earlier this month that Senate Majority Leader Chuck Schumer raised concerns over social security payments stopping if the government indeed defaults.

Social security payments or even veterans’ benefits could be severely affected if the government is forced to default on paying something; that money owed could very well be paid to debt bondholders first rather than social security recipients.

What is the difference between a government shutdown and a default?

A government shutdown happens when Congress cannot agree or fails to authorize the required 12 spending plans for the next fiscal year, known as appropriations bills, according to Forbes. Mostly all types of federal agencies are forced to stop their operations if these spending plans are not authorized, which causes federal workers to go unpaid.

The most recent government shutdown took place in 2018 under President Donald Trump, when the government was shut down for 35 days.

However, a government shutdown does not affect things like social security payouts. That is not the case if the government defaults.

As of press time Tuesday, May 23, lawmakers had yet to agree on a deal to avoid yet another historic event.

Leave a Reply

Your email address will not be published. Required fields are marked *