US debt ceiling crisis nears: How this could create turmoil in the financial world

In Washington, a clash is looming between House Speaker Kevin McCarthy and US president Joe Biden over the debt ceiling.McCarthy for his part has vowed to hold a vote on the debt ceiling this week and pass a bill which increases the debt limit by $1.5 trillion in exchange for steep cuts.Meanwhile, the Democrats led by Biden and Senate Majority Leader Chuck Schumer insist that they are unwilling to negotiate.But what is the debt ceiling? What would a crisis entail? And what can be done to avoid it?Let’s take a closer look:What is it?The debt ceiling, also known as the debt limit, is the amount the United States can legally borrow by issuing bonds to fulfill its financial obligations. Think of it as a credit limit on a credit card.In simple terms, it’s raised to pay for expenses that have already occurred – like Social Security, Medicare, the military.

The US debt ceiling is currently $31 trillion.

President Joe Biden raised it to this level in 2021.The US hasn’t always had a debt ceiling.  Congress created it through the Second Liberty Bond Act in 1917. Prior to World War I, Congress needed to approve each bond issuance through Parliament.The debt limit was created as a workaround to finance the war effort without needing a constant series of votes. It was also done, in theory, to make the government fiscally responsible – though some argue it has done exactly the opposite.As per BGR, the debt has been increased at least 90 times in the 20^th Century. Every president since Herbert Hoover has raised the national debt.Ronald Reagan raised it 19 times, Bill Clinton eight times, George W Bush seven times and Barack Obama five times.What happens if the US hits the debt ceiling?In theory, bad times. Very, very bad times. But not immediately.The government may not be able to legally borrow money, but it can buy some time by using its cash on hand and deploying ‘extraordinary measures’.The measures were first deployed in 1985 and have been used at least 16 times since then, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.Which is exactly what happened in January when the US government bumped up against its legal borrowing limit of $31.381 trillion.[caption id="attachment_12305502" align="alignnone" width="640"]

Treasury Secretary Janet Yellen implemented 'extraordinary measures' in January. AP[/caption]“Treasury Secretaries in every Administration over recent decades have used these extraordinary measures when necessary,” Treasury Secretary Janet Yellen wrote in her initial letter about the measures.The treasury department at the time began implementing “extraordinary measures” to avoid missing payments on its bills.To keep the government open, the Treasury Department in January began a series of accounting maneuvers that would put a hold on contributions and investment redemptions for government workers’ retirement and health care funds, giving the government enough financial space to handle its day-to-day expenses until roughly June.By suspending payments, the government can reduce the amount of outstanding debt, enabling the Treasury to keep financing government operations. What happens if the parties can’t come to an agreement?The unthinkable – the US could default on its debt.Investors would lose confidence in the US ability to pay its bonds, which are seen as among the safest investments and serve as building blocks for the world's financial system.

If that happened, the global financial markets would go  into a tailspin.

The world could see a repeat of what happened during the Great Recession, as per Moody’s.The US could also see four per cent of its GDP cut, stock prices lose a third of their value and six million jobs lost, the firm predicted.Washington’s credit rating could also take a hit – which is what happened in 2011 in a stand-off between then president Barack Obama and the Republicans.The US lost its triple-A status from Standards & Poor’s – a rating it had held for seven decades.“Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability,” Yellen warned in January.“I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”With inputs from agenciesRead all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.