The debt limit or debt ceiling of the United States basically is a legislative limit on the amount of national debt that can be incurred by the U.S. Treasury. It limits the amount of money the federal government may pay by borrowing more funds, on the debt it already borrowed. Kavan Choksi Finance Expert mentions that the debt ceiling is an aggregate figure that applies to gross debt, which includes debt in the hands of the public and intra-government accounts.
Kavan Choksi Finance Expert talks about the impact of breaching the debt ceiling on the US economy
Even short of default, hitting the debt ceiling can hamstring the ability of the government to finance its operations, including providing funding entitlements like Medicare or Social Security. Potential repercussions of reaching the ceiling include a drop off in consumer confidence, a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners, and so on. It may even tip the economy into an immediate recession. Increased interest rates can additionally divert future taxpayer money away from federal investments in areas like healthcare, education and infrastructure.
It has been estimated that a breach of the debt ceiling can halt around one-tenth of U.S. economic active, as well as lead to the loss of millions of jobs. Broadly speaking, failure to meet the government’s obligations can cause great harm to the U.S. economy, and hamper the livelihoods of many Americans.
The creditworthiness of U.S. treasury securities has bolstered the demand for U.S. dollars, and contributed to their status and value as the reserve currency of the world. However, a hit to confidence in the U.S. economy, no matter whether it is due to default or the uncertainties associated with it, may cause investors to sell off U.S. treasury bonds, thereby potentially weakening the dollar.
More than half of the world’s foreign currency reserves are held in U.S. dollars. Therefore, a sudden decrease in its value is likely to ripple through the market for treasuries as the value of these reserves goes down. With the heavily indebted lower-income nations struggling to make interest payments on their sovereign debts, the diminished value of foreign currency reserves can even tip certain emerging economies into debt or political crises.
Kavan Choksi Finance Expert points out that many exporters can benefit from dollar depreciation as it shall accelerate foreign demand for their goods by making them more affordable. However, the same businesses would also have to deal with higher borrowing costs from rising interest rates. The instability of the dollar can benefit certain aspiring great-power rivals like China.
In case congressional negotiations over the debt ceiling do not get resolved before the ceiling is reached, the treasury may stave off a default for a few months with a series of temporary actions or “extraordinary measures.”. These measures may include delaying auctions of securities, under-investing in particular government funds, pending payments to some government employee savings programs and so on. Conversely, technical analysis deals with everyday financial trends, including the performance of the company based on daily uptrends and downtrends in the market. For technical analysis, traders need to closely study a company daily, especially its charts and numbers in the stock market. This data is used by traders to make important predictions about the changes. They largely focus on studying market trends in volume, price, and moving averages.
Even though these measures have been used when previous negotiations stalled, Congress has never failed to raise the ceiling before the measures have been depleted. In case the Congress does not act to raise the debt limit despite these emergency measures, federal spending shall have to plummet or taxes would have to rise.