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Not raising the debt ceiling comes with risks


House Republicans passed a bill this past week aiming to bring President Joe Biden to the table to negotiate the debt ceiling. The White House, meanwhile, has characterized this attempt as hostage taking. So as the government gets closer and closer to a default on its obligations, we wanted to outline the possible economic ramifications if the ceiling is not lifted. And for that, we have Darian Woods from NPR's daily economics podcast, The Indicator from Planet Money. Welcome, Darian.


MCCAMMON: Well, I'd like to start by reminding listeners exactly what a debt ceiling default means.

WOODS: So the government borrows money every year. It hasn't run a balanced budget since the 1990s. Now, this is not unusual internationally, but what is unusual internationally is this cap on Treasury borrowing, even for spending that's already approved. So the government is in this situation where it has the authority to spend the money on programs that it's approved - things like Medicare and Social Security. But without new legislation, the government won't have the authority to raise that money with new debt. That means the government simply won't pay for things that it's committed to pay for.

MCCAMMON: OK. So we're currently at the debt limit. The government seems to be functioning for now. Why is that?

WOODS: Yeah. So since January, the Treasury has been doing these extraordinary measures. These are things like temporarily pulling back on contributions to federal employees' retirement accounts.

MCCAMMON: What happens once those extraordinary measures are exhausted?

WOODS: If the debt ceiling still isn't resolved by the time that the government runs out of funds for its normal operations, which people are estimating might be around June or July, the Treasury will be put in this very tough place where it will likely have to stop or trim payments on other bills that the government has - things like Medicare, the Defense Department and Social Security.

MCCAMMON: But I'm guessing that there would be other ripple effects more broadly throughout the economy, too. What would that look like?

WOODS: So even if the U.S. government keeps paying its bonds back, keeps paying that interest on its debt but it stops some of its normal spending, that would mean the U.S. would get a ratings downgrade. Fed Chair Jerome Powell has spent years thinking about the debt ceiling issue, and he said to Congress in early March that raising the debt ceiling was the only way out of this trouble.


JEROME POWELL: And if we fail to do so, I think that the consequences are hard to estimate. But they could be extraordinarily adverse and could do long-standing harm.

WOODS: It would be harder to borrow, both for the U.S. and everyday people. It would be bad.

MCCAMMON: So, Darian, if the government were to run out of those extraordinary measures and beyond, if it can't stop spending and runs out of money anyway, what options does the government have?

WOODS: There's been this fear of the government defaulting on its actual loans, and that would be so catastrophic economically that it's hard to imagine. U.S. Treasury bonds are sort of unique in that they're this ultra-safe asset that can be traded easily all over the world. And so companies and governments hold U.S. Treasuries almost as these kind of interest-bearing substitutes for cash. And so there would be a cascade of ripple effects in the U.S. and internationally if that key assumption about the safety of treasuries proved false. Banks would likely stop lending as much. Economic growth would wilt, and everyday people in the U.S. would also find their borrowing costs soaring. And so, for example, the interest rate on mortgages is often related to the going rate for 10-year Treasuries.

MCCAMMON: How likely is any of this to happen?

WOODS: That particular scenario around debt not being repaid is unlikely to happen, both for legal reasons and because the Treasury would be doing everything it could to avoid it. But given the brinkmanship happening in Congress, markets are sending concerning signals. The interest rate on three-month Treasury bills is noticeably elevated at the moment, and that is a sign that markets are worried that politicians might not come to an elegant solution over summer.

MCCAMMON: That was Darian Woods. He's the co-host of The Indicator from Planet Money. Darian Woods, thanks so much for your insight.

WOODS: Thanks a lot. Transcript provided by NPR, Copyright NPR.