The US federal debt has skyrocketed to a jaw-dropping $31.4 trillion, dangerously close to the legal borrowing limit known as the “debt ceiling.” As divisions within the Republican party deepen, a solution to raise the debt limit might be harder to reach than ever, risking a government shutdown or default.
The cost of insurance against a federal default has soared to its highest level in over a decade. The Congressional Budget Office predicts that by July, the US government could run out of money, leaving Uncle Sam unable to pay the bills. Failure to raise the debt ceiling could spell catastrophe, potentially triggering a financial crisis like the one in 2008.
As the 2024 election approaches, both Democrats and Republicans have their own solutions, making compromise inevitable. However, the question remains: what will Republicans accept? Will it be House Speaker Kevin McCarthy’s plan or the demands of Trump-supporting rebels?
In the end, it’s likely the two parties will meet in the middle to avoid default, but the hyper-polarized climate in Washington leaves no guarantees. And with negotiations pushed to the eleventh hour, this debt ceiling showdown might be the toughest challenge yet.
THINK LIKE AN ECONOMIST!
Q1. Define the term “national debt” in the context of the US economy.
Q2. Explain one reason why the US federal debt has reached such high levels.
Q3. Analyse the impact of the US government reaching its debt ceiling on the price of government bonds, using an appropriate diagram.
Q4. Discuss the advantages and disadvantages of raising the debt ceiling as a solution to the current US debt crisis.
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