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US debt defaulted again – Now What?

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After a two-year hiatus, the US debt ceiling went back into effect on Sunday, with lawmakers in Washington still debating how to avoid a potential default later this year.

The debt ceiling, or the maximum amount the federal government can borrow, was set at $22 trillion in 2019. When the suspension ends, it will revert to the current level of debt, which had risen to $28.5 trillion by the end of June, putting pressure on Congress to find a solution that will allow the government to continue borrowing.

“This is the day that the clock starts ticking,” said David Wilcox, senior fellow at the Peterson Institute for International Economics.

“It’s the day that really begins to capture the attention of lawmakers to let them know that they need to come to the bargaining table. It’s a little bit like the starter’s gun in a 200-meter dash.”

In August 2019, as part of a budget deal in Congress, the debt ceiling was paused for two years. Democrats, who hold a slim majority in both chambers, have yet to propose a plan to raise or reinstate the debt ceiling.

The United States is on the verge of defaulting as early as October if no action is taken. Since the 1980s, debt-ceiling crises have avoided this outcome, though the federal government has occasionally been forced to shut down until a deal could be reached.

On Friday, the Treasury Department began taking special measures to shore up cash reserves. At noon that day, officials halted the sale of State and Local Government Series securities, which assist local governments in investing bond proceeds. Another option for the Treasury is to halt new investment in funds for retired public-sector workers.

Democrats said last week, before departing for the August recess, that they would address the debt-ceiling issue, but provided no further details.

There is no concrete plan to approach the debt ceiling through budget reconciliation, according to House Budget Committee Chairman John Yarmuth and Senator Dick Durbin, the Senate’s No. 2 Democratic leaders. This would avoid Republicans while giving President Joe Biden sole ownership of a potentially unpopular move.

Other options include negotiating with Republicans to raise the ceiling in exchange for agreeing to some of their preferred budget items, or tying a ceiling increase to other bills that must be passed.

Despite the current situation, the US Senate approved a bill on $ 1 trillion in investments in roads, bridges, ports, high-speed Internet and other infrastructure.

Image Credit: Getty

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