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The Debt Ceiling: What is it, and why playing with it is so dangerous. [1]

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Date: 2023-01-13  

So, welcome back to 2011 re: politics that actually matter to everyday people's wellbeing. So, we're going to have another fight over raising the debt ceiling. Republicans want to use the debt ceiling to demand less government spending. They also will demand cuts and big changes in Social Security and Medicare in exchange for raising it.

So what is it and why is playing with it like playing with an economic nuclear weapon? The debt ceiling was a law put in place to authorize payment on existing debt. This is debt we have already gone into through federal government spending that Congress has already authorized. If we can't pay the interest on our debt, even for a very short time, the US would be in default.

Such a result would have catastrophic economic impact. Literally hundreds of trillions of $$$ in assets are secured with United States treasury bills. Not paying interest on that debt would create such uncertainty that many of these assets would be severely devalued. That would make lenders "foreclose" on some of these assets. This deleveraging process will cause a global depression. For everyday Americans dependent on Social Security payments and Medicare for accessing healthcare, those payments would stop. Sadly, there is even more. Interest rates would go up dramatically, making it much harder for Americans to afford homes and cars.

Now, the worst potential impact long term: the dollar could lose its status as the "global reserve currency" That means that most trade around the world is done in US dollars, allowing for amazing flexibility for the US to print money and borrow. Because our currency has this status, we could, in an emergency literally print money our way out of debt or print money to fund a war. (Note, I am not saying this is a good idea) It allows us to sell debt (treasure bills) at a lower interest rate, making it easier for the government to fund everything less expensively. No other country has this economic advantage. There are many reasons we have this advantage, but trust is the biggest reason. If we didn't pay our debts, other nations might decide to accept payments in another currency from a more trustworthy nation (or coalition of nations) For example the Chinese yuan or the Euro could become the new global reserve currency. That would eliminate a significant ongoing economic advantage the US has enjoyed since the end of World War II.

So, politicians shouldn't be using this tool as leverage because of the catastrophic consequences of actually going through with breaching the debt ceiling. To control spending, Congress needs to authorize less spending. The American people should be demanding this. Unfortunately, the American people have a bad habit of not asking enough of our elected officials and actually holding them accountable.

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[1] Url: https://www.dailykos.com/stories/2023/1/13/2147135/-The-Debt-Ceiling-What-is-it-and-why-playing-with-it-is-so-dangerous

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