Is the US About to Default on Its Debt?

Whether you like to talk about politics or not, the things that are happening in Congress right now will affect your retirement.

All the unmitigated spending during the Covid pandemic is catching up with the US. Treasury Secretary Janet Yellin revealed further measures to avoid breaching the federal government’s borrowing limit and also announced they would be suspending reinvestments for a number of retirement funds.

Debt negotiations have always been a game of chicken between the Democrats and the Republicans, but there’s more at stake right now.

The Treasury uses emergency maneuvers to conserve cash so the government can keep making payments on its obligations. Once those measures run out, the Treasury could begin to miss payments which could trigger a default on US debt.

A default on the debt in the US has never happened before, and if it did happen it would likely precipitate a global depression.

There are only two things the federal government is Constitutionally required to pay: Civil War pensions, and interest on the national debt.

Similar instances have happened in the past, like in 2011 when Standard and Poor stripped the US of its AAA rating for the first time.

If we default on our debt, it could trigger a sovereign debt crisis, which will likely result in the costs of servicing the national debt to go up dramatically.

The debt ceiling has been raised 98 times in the past, but it’s possible for this time around to go differently.

It’s possible that the tipping point will occur mid-September and we could be seeing the consequences of this as early as October. 

We refinance the national debt every two years, so when interest rates go up it gets even more expensive to service the debt, and that can result is taxes being raised even earlier than we thought.

The national debt is projected to increase by $3 trillion by the end of 2021. 

All of this is a backdrop to the Democrats trying to pass a $1 trillion infrastructure bill and a $3 trillion human infrastructure bill through Congress.

The Democrats want the debt ceiling increase to be a bipartisan effort, but the Republicans are positioning themselves as opposing the increased spending and forcing the Democrats to own the bill.

It seems like no one saw this spending initiative coming face-to-face with the fiscal constraints of the repercussions of unmitigated spending by both parties over time.

Mitt Romney said that the Democrats would be wise to raise the debt limit in reconciliation and own the decision.

Joe Biden’s tax increase initiative is part of the drama. If this debt crisis implodes, he may not get anything that he wants and the Trump tax cuts may simply expire in 2026.

 

Mentioned in this Episode:

Janet Yellen to Enact Steps to Avoid Breaching Debt Ceiling - wsj.com/articles/janet-yellen-announces-measures-to-avoid-breaching-debt-ceiling-11627936540

McConnell vows no GOP help with debt limit hike - politico.com/news/2021/08/05/mcconnell-gop-debt-limit-502593