2. Executive Summary

The debt ceiling in the United States, created in 1917, was founded on the principle of controlling the U.S. debt accrual and government spending. As one of a few countries that have a debt ceiling, there is constant and ongoing discourse regarding the debt ceiling’s true impact on the economy. Over the past century, even with the deterrent of the debt ceiling, the U.S. government is continuously running a deficit that is increasing by trillions each year. Because of this enormous expenditure, this has prompted repeated attempts to avoid default, rendering the tool ineffective for its original purpose. Instead of restraining the national debt, the debt ceiling has brought further risks of financial turmoil if a default were to occur.

In fact, this topic has gained attention in recent years as the 2023 Debt Ceiling crisis proved that such a solution still hasn’t been in place. Although lawmakers came into an agreement in June of 2023 to suspend the Debt Ceiling until 2025, discussions will eventually arise once more, placing the country once again at brinksmanship.

This brief analyzes the history and current state of America’s debt ceiling as well as the impact it has on social, economic, and legal levels. Indeed, to further analyze the specific effects, it also examines relevant stakeholders including investors, taxpayers, etc. to better predict a doomsday scenario in the case of a debt default.

Finally, in response to potential concerns, several thorough solutions are outlined to devise a comprehensive policy plan to begin the reform of the Debt Ceiling.

3. Background

3.1 History of the Debt Ceiling

A key facet of the American economy is the debt ceiling was created by Congress with the Second Liberty Bond Act in 1917 and founded upon the principle of setting a capacity of debt that the U.S. could reasonably maintain.¹ Ultimately, this debt ceiling would be changed a total of 93 times over the course of 100+ years.¹ The first debt ceiling was established for the Treasury Department in July of 1939 by Congress at 45 billion dollars to facilitate simpler, more efficient financing of World War II mobilization efforts.¹

Despite this, in the following years, the U.S. began to accumulate significant debt as it got involved in more global wars such as, for example, WWII, in which it racked up 285 million dollars in debt.² During the post-wartime period, the payoff was for establishing itself as a global military superpower and protecting the ideals of American democracy. The United States' increasingly outstanding account with countries from the UK to Japan.³ For this duration, the trend of debt accrual continued as the U.S. increased its debt limit annually. However, according to the Bipartisan Policy Center, the debt ceiling was lowered after WWII, “as war costs dissipate[d] and the federal government [began] to run three years of surpluses.”⁴ For the next 8 years (the longest period of stagnation till that point), the debt limit remained the same. In the following three years, Congress approved 2 more "temporary" limit raises, putting the maximum at $281 billion until 1957 when it reverted to the default of 275 billion dollars.^4,5

Over the next few decades, Congress continued to raise the debt ceiling:

From 1962 to 2011, there were 74 instances wherein the debt ceiling was raised under 5 different presidents.⁶
In December of 1985, the ceiling was raised to 2.1 billion.⁶
In August of 1997, the limit was raised to almost 6 trillion.⁶

Currently, the U.S. spends almost 1 trillion dollars more than it receives in taxes, thus contributing to a vicious cycle of dependency and liability through debt. In terms of recent developments, in January 2021, the debt ceiling was raised to 31.4 trillion dollars, and it was reached again 2 years later on January 19, 2023.⁶

To combat this, President Joe Biden signed the bipartisan Fiscal Responsibility Act of 2023 on June 3, 2023 to temporarily suspend the debt ceiling and reduce the national debt by an approximate projected 3 percent, "from $46.7 trillion (or 119 percent of gross domestic product, or GDP) to $45.2 trillion (or 115 percent of GDP)."⁷

3.2 Debt Ceilings Globally

Debt ceilings exist in several parts of the world. For instance, in 1993, Denmark, created an upper limit for borrowing “950 billion Danish kroner” believing it was a constitutional necessity.⁸ However, even with a similar system to the U.S., Denmark has never faced a risk of default, currently running on a budget surplus. This is because Denmark “spends much less compared to the size of its economy, with a debt-to-GDP ratio of 37% in 2021.”⁹ However, it is important to note that such comparisons to the U.S. may be skewed as Denmark's economy and population are much smaller.⁹

Outside of a strict debt ceiling, several countries also have a cap on their debt-to-GDP ratio. In Australia, they introduced “a debt ceiling in 2008 to bolster its fiscal credentials” after the 2008 recession.⁹ However, after raising the ceiling multiple times, both parties agreed to ditch the plan due to its unnecessary stress on the economy.

Moreover, in Kenya, the debt ceiling fuels public investments and acts as an economic damage control. For example, in January 2013, Kenya increased the limit from 800 billion shillings “to accommodate infrastructure projects and adjust for the depreciation of local currency.”¹⁰

3.3 Recent Implementation

On June 3, 2023, Biden signed a bipartisan deal called the “Fiscal Responsibility Act of 2023” which was voted in by an overwhelming 314 to 117.¹¹ The act promised to raise the debt ceiling until 2025 to avoid a world where the U.S. would default and, according to Reuters, “staves off a devastating U.S. default, but does little to slow a massive buildup of federal debt now on pace to exceed 50 trillion in a decade.”¹² As the U.S. Chamber of Commerce stated, “Defaulting would mean the U.S. government no longer always pays its bills. Treasuries would no longer be risk-free. Interest rates for the government and everyone else would rise as the financial system tries to sort itself out. The role of the dollar globally would be weakened, perhaps permanently.”¹³

Further back, the U.S. passed the “Debt Ceiling Reform Act” in late 2021 to increase the debt ceiling by 2.5 trillion dollars - but in stark contrast to the “Fiscal Responsibility Act of 2023” which was passed by a landslide, Democrats had to unite to overpower the Republican opposition with a vote of 221 to 209.¹⁴

3.4 Domestic Sentiment

While the debt ceiling is more well-known in the eyes of domestic policymakers, the United States public is keenly interested in the debt ceiling. In fact, PBS found, “About two-thirds of U.S. adults say they are highly concerned about how the national economy would be affected if the U.S. debt limit is not increased and the government defaults on its debts.”¹⁵

This shows good progress, but, regrettably, the U.S. public remains mostly uninformed. An Economist survey found that only 37% of people knew that a crisis would emerge if the U.S. defaulted on the national debt, with the rest thinking of it as a problem that had a moderate impact if any at all.¹⁶ This is particularly problematic given that a default would be devastating for professional and domestic communities across the United States, likely sparking a recession from within. Therefore, PBS concludes that people who are more informed are generally more likely to hold sentiment toward a lift in the federal debt ceiling.¹⁵

Regardless, domestic sentiment exists in the informed public, and generally, as a Harvard Harris Poll in 2023 confirms, U.S. citizens believe that the federal government has spent too much and accumulated more debt than is sustainable in the long term.¹⁷ These findings are strong indicators that most Americans would be receptive to the government raising the debt ceiling, at least in the short-term until a portion of the debt can be paid off, particularly among the more informed demographic.

4. Concerns about Debt Defaults

4.1 Job Loss

As the U.S. approaches a default on its debt, the potential economic impact could be devastating for millions. According to Moody’s Analytics from March 2023, a debt ceiling breach for one week would cause 1.5 million people to lose their jobs, as well as increase the unemployment rate from 3.5% to 5%.¹⁸ If the breach lasts for 2 months, almost 8 million people will lose their jobs, and unemployment will increase to 7.8%.¹⁸ "The economic downturn that would ensue would be comparable to that suffered during the global financial crisis," Moody's Analytics warns.¹⁸

However, this job loss will hit certain occupations harder while others may be left mostly unharmed. According to Michelle Holder, a labor economist at John Jay College, a potential breach will hit primarily in the construction and manufacturing sectors. "When the economy starts to slow down, people stop spending money on things you can touch: cars, homes, computers, and clothes," she says.¹⁹ Hence, it’s no surprise that the worker demographics that would be most impacted are the less educated and Black and Hispanic workers who are heavily involved in manufacturing and distribution. This is empirically proven according to an economic study published in 2010 about Demography; it states that workers of African-American descent are typically the first to get fired when the economy is struggling.²⁰

In the event of a debt default, the states that will suffer the most job loss will be those that are reactive to business environments such as tourism, such as Arizona, Nevada, and Florida. When consumers hold back on spending, particularly “big spending” states such as Michigan and South Carolina, which are dependent on the auto industry business, will also suffer.¹⁹ Last but not least, as predicted, states like Indiana and Wisconsin, which are immensely dependent on manufacturing, will also experience tremendous job loss.¹⁹

4.2 The Global Financial Crisis

Another economic issue that will undoubtedly arise from the United States defaulting on its debt would be a broad market crash. At least on Wall Street, a huge selloff would occur. In fact, UBS analysts predicted that the S&P 500 would fall roughly 20% at default.²¹

According to extensive simulations conducted by Moody's Analytics model of the United States and related global economies, analysts determined that if a political impasse were to persist for several weeks, the resulting economic downturn would be of a similar scale to the global financial crisis in 2008. These simulations indicate that the real GDP would witness a significant decline of approximately 4%, reaching its lowest point during this period. Furthermore, an alarming consequence would be the loss of nearly 6 million jobs, leading to a surge in the unemployment rate to over 7%.²²

Moreover, the stock market would bear the brunt of this turmoil, experiencing a drastic decline of approximately one-third during the most severe selloff period. This substantial drop in stock prices would inevitably result in the depletion of approximately $12 trillion in household wealth, causing a significant financial setback for numerous individuals and families. Alongside the predicted fall in the S&P 500 as mentioned earlier, these statistics point to a prolonged market crash .²¹ In fact, when one looks back to the financial crash in 2008, a prior example of this circumstance is seen. In September 2008, when the House of Representatives rejected a rescue package as our country was on the edge of a financial crash, the Dow Jones Industrial Average dropped a record 778 points, sparking a period of falling prices for the market.

As of 2023, both Republicans and Democrats eagerly signed a deal to suspend the United States Debt Ceiling, which according to Reuters, “staves off a devastating US default, but does little to slow a massive buildup of federal debt now on pace to exceed 50 trillion in a decade.”²³

More specifically, Biden signed a bipartisan deal called the “Fiscal Responsibility Act of 2023” which was voted in by an overwhelming 314 to 117.¹¹ This act promises to raise the debt ceiling until 2025 to avoid a world where the US would default. As the U.S. Chamber of Commerce says, “Defaulting would mean the U.S. government no longer always pays its bills. Treasuries would no longer be risk-free. Interest rates for the government and everyone else would rise as the financial system tries to sort itself out. The role of the dollar globally would be weakened, perhaps permanently.”¹³

Further back, the US passed the “Debt Ceiling Reform Act” in late 2021 to increase the debt ceiling by 2.5 trillion dollars - but in stark contrast to the “Fiscal Responsibility Act of 2023” which was passed by a landslide, democrats had to unite to overpower the Republican opposition with a vote of 221 to 209.¹⁴

4.3 Impact on US Credit Rating

Credit ratings are important, as the Budget Committee explains, “credit rating agencies…provide ratings of the creditworthiness of debt issuances (from sovereign nations, municipalities, and corporations) as a tool for investors. These ratings generally range from a high of AAA to D, with a rating below BBB- often considered ‘noninvestment grade’.”²⁴ Thus, this credit rating is of the most consequence not only domestically, but also through an international lens.

As the U.S. continues to approach a debt ceiling default, it is crucial to understand the implications on the nation's credit score. A credit score is an indication of a country’s ability to pay off its debts, and this downgrade is an indicator of internal issues primarily relating to the nearly defaulted debt ceiling.²⁵ Empirically, NBC reports, “Fitch downgraded its credit rating for the U.S. government, from AAA to AA+, two months after the debt ceiling crisis was resolved.” NBC explains why, writing that, “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.”²⁶

Therefore, another debt ceiling crisis might prove that the American government is deteriorating, and thus ensure that the U.S.’ credit rating fails to reach previous levels. But, perhaps more devastating, is the implication that, should we default another time, the rating may take another hit and further crumble the nation’s economic value on a global scale. With the U.S. dollar serving as a global vehicle currency, the impact thereof could be catastrophic.²⁷

4.4 Effects on National Borrowing

When a country experiences a debt default, it is unable to meet its financial obligations - this can include the financing of social security programs, military pensions, and bond repayments. While the United States has missed debt payments in the past, a complete default is largely uncharted territory. But, even though there is no perfectly aligned vision of what will happen if the U.S. defaults, one thing is clear – it would be catastrophic for the country’s borrowing power.

Naturally, stock prices would go down and federal welfare programs would be affected. But, when it comes to borrowing by itself, one potential major issue relates to U.S. Bonds. Since the U.S. Dollar is a global reserve currency, these bonds are seen as one of the most stable investments in the world. If the U.S. is unable to pay its creditors back, interest rates on U.S. debt would increase, which would reflect across the board as mortgage rates, credit card rates, and other loan rates would increase as well.²⁸

Eventually, this level of federal debt would become unsustainable. As federal debt increases, it would place strain on the national budget and could put the funding of other priority expenditures in jeopardy. The Congressional Budget Office has already warned that federal interest payments on its debt will climb close to 200%, going from 6.8% of federal spending in 2017 to nearly 21% by 2047.²⁹ Even without an increase in national borrowing, the sheer weight of interest payments could lead to a catastrophic spending situation.

As U.S. Treasury Secretary Janet Yellen warned, the income shock and decrease in borrowing would affect more than just individuals.³⁰ A decrease in borrowing capacity could hurt small businesses and even large corporations, resulting in a further economic recession.³¹

4.5 The Housing Market

As previously stated, if the U.S. experiences a default, it will not be able to pay its creditors back, thus affecting creditors’ confidence which will ultimately cause interest rates to skyrocket.³² If the central bank is raising interest rates to counter the suffering economy, mortgage rates will increase as well. It is predicted that by September, mortgage rates could rise to 8.4%. If the debt ceiling gets surpassed, Zillow predicts that mortgage prices on a typical home would be 22% more expensive, and the market will most likely “freeze”.³³ This could lead to a sharp decline in the prices of houses, which would cause a collapse of the housing market as real estate would lose a significant portion of its value, at least temporarily. In response, central banks may implement expansionary monetary policies and reduce interest rates to stimulate economic flow.³⁴

4.6 Petrodollars

The notion of the petrodollar, which underscores the link between global oil transactions and the U.S. dollar, intersects with the intricacies of the United States' debt ceiling policy. While the debt ceiling's primary impact is felt domestically, its repercussions can reverberate within the international petrodollar framework. Central to this nexus is the confidence instilled in the U.S. dollar, which assumes a paramount role in global oil trade and serves as the world's premier reserve currency. This standing is intrinsically linked to the robustness and assurance of the U.S. economy.

However, when the U.S. approaches its debt ceiling and confronts the specter of default, apprehensions about the government's capacity to fulfill its financial commitments arise. This uncertainty, in turn, has the potential to erode faith in the U.S. dollar and undermine its position as the primary medium for oil trade.³⁵ The peril of default amplifies the ramifications. Should the U.S. fail to elevate the debt ceiling and default on its financial obligations, the ramifications would cascade across the global economy. Such a default would likely trigger a momentous financial crisis, inducing turmoil within international financial markets, heightening borrowing costs, and potentially steering the world toward a recession. These ramifications would extend to oil-producing nations and their economies, while concurrently affecting the stability of the petrodollar framework.³⁶ The prospect of a shift in currencies for oil transactions also warrants attention. The petrodollar model, which emerged in the 1970s, engendered a landscape where U.S. dollars predominantly facilitated oil transactions. This structure bolstered the demand for the dollar and nurtured its role as a preeminent global reserve currency.

However, should concerns over the debt ceiling persist or faith in the U.S. dollar wane, oil-producing nations might explore alternatives for settling oil trades. This could encompass acceptance of diverse currencies, including the euro, yuan, or yen, thereby diminishing the reliance on the petrodollar and challenging its supremacy.³⁵ Geopolitical dimensions also come into play. The petrodollar framework bears geopolitical consequences, conferring the United States with influence over global energy markets and sway over oil-producing states. Any substantial divergence from the petrodollar norm could recalibrate geopolitical dynamics and the standing of specific nations. Should oil-producing countries embrace currencies apart from the U.S. dollar in oil trade settlements, the stature of these currencies could be bolstered, possibly weakening the petrodollar's dominion.³⁷

It is imperative to underscore that the interplay between the debt ceiling and the international petrodollar framework is intricate and subject to multifaceted variables including economic circumstances, market kinetics, and geopolitical factors. The outcome of the debt ceiling's impact on the petrodollar paradigm can fluctuate contingent on distinct circumstances and the responses undertaken by pertinent stakeholders.

4.7 International Political Control

Exceeding the debt ceiling engenders a relinquishment of political authority, prompted by various underlying factors. Foremost, the failure to elevate the debt ceiling precipitates fiscal uncertainty, casting doubt on the government's capability to meet its financial commitments. This casts a shadow over market confidence, giving rise to economic instability and thereby undercutting political control.^38,39,40 Additionally, the consequences extend to financial market tumult. When the debt ceiling is left unraised, market disruptions ensue, accompanied by escalated borrowing costs and the specter of potential credit rating downgrades. These outcomes erode the sway of political governance over economic stability.^38,39

Equally noteworthy is the erosion of credibility. An inability to effectively manage the debt ceiling erodes the government's standing and competence, thereby impairing its governance efficiency and sapping public trust.⁴¹^,⁴² This crisis of authority reverberates through budgetary and policy realms, diverting attention away from pivotal policy concerns and budget considerations and detracting from other pressing legislative priorities.^1,⁴³

Furthermore, the repercussions extend to economic realms. The aftermath of breaching the debt ceiling harbors the potential for economic downturns, burgeoning unemployment, and diminished tax revenues, thereby impacting the political authority wielded over the nation's economic well-being.^39,42

The ramifications of surpassing the debt ceiling coalesce to forge a dilution of political control, thereby reinforcing the urgency of adept fiscal management.

4.8 Governmental Spending Loss

In addition to its economic impacts, a debt ceiling failure would have substantial social ramifications. Primarily, we could see a loss in social expenditure programs such as Social Security and Medicaid, which a significant portion of Americans depend on. Specifically, just during the 2022 debt crisis, Treasury Secretary Janet Yellen warned that “unless Congress passes legislation to raise the limit,” there will not be enough cash to cover spending past June 1.⁴⁴

This would not only go against the Antideficiency Act, which forbids the government from spending more than how much cash it has on hand, but also brings hardship to the millions of families that “rely on Social Security as their main source of income.”⁴⁵ In fact, “almost two-thirds of beneficiaries depend on social security for at least half of their income” with roughly 40% receiving more than 90% of their income.⁴⁶ Such a scenario similarly occurred in 2011. During this time, the Treasury developed a contingency plan, delaying payments for numerous commitments, including Social Security benefits, to prevent having to make only select payments until there was enough cash to “pay a full day’s obligation.”⁴⁷ Even so, such a contingency plan would risk millions not receiving their paycheck in time for their next meal or rent.

4.9 Rampant Inflation

Economists throughout the country are concerned about a U.S. debt default due to the inflation crises that ensue. Particularly, National Affairs explains this by saying, “If people become convinced that our government will end up printing money to cover intractable deficits, they will see inflation in the future and so will try to get rid of dollars today — driving up the prices of goods, services, and eventually wages across the entire economy.”⁴⁸ In other words, the mere perception of a default - often exaggerated by media outlets and social media - will drive up inflation to a point of no return.

But, the scope of inflation is not just domestic. When inflation goes up in the U.S., it becomes significantly harder for countries abroad to import U.S. goods.⁴⁹ This is especially concerning because it deals another hit to the domestic economy: as sales fall short, global supply chains are disrupted and countries shift away from U.S. goods in favor of cheaper imports.⁵⁰

Ultimately, a debt default in the United States would create ripple effects that spread from a local level to ultimately have an impact on the international economy.

4.10 Tradeoff with Other Sectors

The debt ceiling indicates that the United States organization of financial and political assets is destabilized, meaning that the distribution of investment to various sectors will no longer be predictable. In layman’s terms, funding has to be moved around in a feeble attempt to restabilize the economy, and some sectors will need to sacrifice their source. Investor confidence in these sectors will inevitably decline because they will inevitably underperform. Some examples of sectors that will lose their stability are technology, innovation, climate change, and healthcare. An investment tradeoff with these sectors is especially devastating because of their necessity in the status quo, triggered by factors such as the COVID-19 pandemic, great power competition, and a rapidly warming planet from unsustainable development patterns.

The technology sector is a poster child of the importance of investor confidence. David Randall from Yahoo Finance in May explained that megacap stocks such as Google parent Alphabet, Microsoft Corp, and Amazon have all been attractive safe havens for investors worried about a stock market crash.⁵¹ This has boosted their share value and market index, leaving smaller companies behind. However, the debt-ceiling crisis will reverse the trend. The market as a whole is suffering from a few outliers which are the megacap stock companies. Thus, an event in which the government has to reorganize resources will cause the market to broaden out, and the less influential stock companies in the status quo will outperform mega-cap stocks because of lower volatility in investment.

Scientific innovation will rapidly decline, even if a worst-case scenario is avoided. Jeff Tollefson from Scientific American warns that as politicians engage in unproductive discourse over government spending, a decade’s worth of scientific research and budgeting is at risk.⁵² Science research & development (R&D) is not effectively prioritized at the national level, causing dangerous shifts away from funding for this sector. Historically, during the Obama administration, Republicans used a looming debt-ceiling crisis to limit R&D spending for nearly a decade. Funding for R&D was reduced by an estimated U.S. $ 240 billion over the next nine years.⁵³ To contextualize, that is the budget required to sustain the NIH—the largest biomedical research firm globally—for five years at its budget in the status quo. With the current debt ceiling, R&D budget cuts could be exponentially more disastrous. Matt Hourihan, who analyzes science budgets for the Federation of American Scientists, predicts that federal investments in science would be reduced by an estimated $442 billion through 2033.⁵⁴ Such a cutoff would devastate the development of biomedical drugs, biotechnology, vaccines, and pharmaceutical necessities, potentially killing millions of Americans in need of medicine.

Climate change is at the forefront of acceleration because of debt-ceiling tradeoffs. Primarily, Tim McDonnell explained that there is a long-standing argument on the use of fossil fuel infrastructure versus renewable technology.⁵⁵ Unfortunately, debt-ceiling legislation could delay the permitting of renewable technology because of astronomically higher costs of renewable development. Thus, the likelihood of fossil fuel infrastructure gaining priority at the national level is far too high. Tradeoffs caused by the debt ceiling cause a lower budget for climate action, making fossil fuels the more economically sustainable choice regardless of their impact on global warming.

Patient access to healthcare assets and reimbursement are vanishing because of debt ceiling management. However, healthcare is not immune to financial disasters, and a debt ceiling crisis could cause the healthcare sector to make significant sacrifices in its spending and deployment of medicine.⁵⁶ Medicare and Medicaid beneficiaries, including rural hospitals, will be in jeopardy. Healthcare providers are short-staffed in nearly every department in terms of clinicians and administrative employees. A viable solution would be technologically self-service, but the technology sector is also significantly declining because of the debt ceiling.

The tradeoffs are, at best, temporary solutions to the debt ceiling. However, it is reasonable to assume that all the budget cuts are nothing but a drop in the bucket of international financial crises.

5. Stakeholder Analysis

5.1 Government and Government Employees

The downgrade in the U.S. credit rating could initiate a domino effect, causing panic in financial markets and disrupting economic stability. The first demographic that will be affected is government employees who take the brunt of federal budget cuts as they face furloughs, pay cuts, and even dismissal.⁵⁷ As the government's financial situation deteriorates, there could be disruptions in the timely disbursement of salaries, pensions, and benefits to federal workers.⁵⁷ This not only creates financial hardship for government employees and their families but also reduces morale and job satisfaction, thus leading to a decline in efficiency and productivity.

Moreover, a debt default could force the government to implement budget cuts across various departments - this could result in hiring freezes, reduced training and development opportunities, and limitations on public service delivery.⁵⁸ Government agencies responsible for critical functions such as national security, public health, and disaster response could also be disproportionately affected, which would be of utmost consequence as these are departments that cannot afford to skimp - shortcomings national security and healthcare have significant daily repercussions, and a lack of delivery could cause public trust in the government's ability to erode as it fails to uphold its obligations, potentially leading to increased political polarization and citizen dissatisfaction.

The credibility of the government's financial commitments would be tarnished, and the livelihoods of government workers could be jeopardized.³⁹ Therefore, policymakers must recognize the importance of timely and responsible management of the debt ceiling to safeguard the interests of these vital stakeholders.

5.2 Investors

Domestically, Fidelity explains, “…U.S. stocks have historically turned volatile as the government has approached the debt ceiling and then have risen on average in the months following an agreement to raise the debt limit.”⁵⁹ This is a general economic trend that exists whenever a debt ceiling push is established. This occurs because, as Fidelity furthers, “the Treasury will rebuild the TGA by issuing new debt, which effectively reduces money coming into the banking system. This action combined with the Fed maintaining higher rates and continuing to reduce the size of its balance sheet may produce periods of higher volatility.”⁵⁹ Thus, domestic investors will be heavily affected by such volatility, and more likely than not, end up losing money.

On the foreign metric, the answer is still the same. Alexandra Sharp from Foreign Policy explains, “A default could see foreign investors charging the United States more money to borrow if Washington becomes a risky investment.”⁶⁰ Every default turns the situation increasingly bleak, which means that, soon enough, we may be near the tipping point at which investors notice that their investment in the U.S. might not bear fruit and withdraw. This, unfortunately, would be the final straw in the fall of the U.S. economy, as economic recuperation is impossible without aid from foreign investment. In an economic collapse, the GDP would fall 4.6%, and “$10 trillion” of household wealth would be wiped out.⁶¹

5.3 Corporations and Wall Street

Investor confidence is the driving force of stock exchanges, and the debt ceiling and investor confidence have an inverse relationship - as one increases, the other decreases. As the default approaches (as is currently occurring), Wall Street (the public stock exchanges throughout the United States) faces disastrous stock market crashes during national economic disorganization. During the debt ceiling crisis, investor confidence was astronomically low. The U.S. government is unable to orient its financial policies, which leads to industries driving the stock market such as manufacturing, import/export, infrastructure, etc. to face critical conditions involving declining share values and return on investment. Historically, Wall Street has faced a substantial decline in economic productivity during debt ceiling catastrophes. Eric Wallerstein, a reporter for the Wall Street Journal in May explains that in the debt-ceiling crisis of 2011, financial markets were rattled and U.S. credit scores plummeted.⁶² Economic analysts fear that more downgrades could shake investor confidence to an all-time low, potentially raising borrowing costs for the government and taxpayers.

With U.S. stock markets being globally interconnected via import/export patterns and international stock expansions, a debt-ceiling crisis in the U.S. could send shockwaves globally as megacap stock companies and emerging enterprises lose their market value and investor confidence. Senior writer and analyst Sarah Hansen said in June 2023 that, over the discussions of how to handle the debt ceiling, investors must brace for the impact of market volatility due to uncertainty in economic policymaking.⁶³ The crisis is only exacerbated by rising interest rates and fears of a recession, which cause increased volatility and decreased financial management.

The liquidity of the market—how easy it is to buy and sell assets, with more liquid assets like stocks being easier for investors to move quickly—is also at stake. If the government issues all the debt to investors, assets that could have been freely moving will instead remain stationary in the U.S. Treasury. This could severely destabilize the banking sector because a decreased flow of money through banks causes unreliable cash reserves and banking collapses. Historically, declines in liquidity have devastated the economy, and this time will be no different.⁶⁴

5.4 Educational Institutions

Currently, many educational institutions such as colleges and K-12 schools are attentive to the debt ceiling timer because a debt default will immediately impose lasting effects on education. Worryingly, in the priority list that needs to be funded amongst a long-term default, experts state that education may not have a spot. Therefore, if the default were to happen before July 1, 2023, the federal government may not be able to distribute money for high-need students and special education services.⁶⁵ This would be deleterious as many school districts depend on those funds to operate day-to-day. Schools will not all immediately shut down, but many students will lose out on the aid they desperately need.

This could be detrimental in the long run as a default could lead to fewer resources and diminishing state tax revenues for public schools. “The results will be so catastrophic,” said Sarah Abernathy, the executive director of the Committee for Education Funding. “There’s a ton of uncertainty, and none of the outcomes are good.”⁶⁵

However, colleges are still optimistic that any potential default would only affect a limited number of students because a majority of their aid is given out during the fall and winter seasons.⁶⁶

5.5 Taxpayers

Tax collection is the decisive factor in whether or not the debt ceiling is needed. Luhby writes that, “If cash flows are dramatically short of expectations and could result in the need to act in June, then things will start moving very quickly once we get into May,’ ... ‘Whereas if they feel like they have an additional month or two or more, then they’ll likely take up that time, as we’ve seen them do time and again in the past.”⁶⁷

While prior to the actual debt ceiling default, money in the economy will rise alongside inflation, once the actual debt ceiling occurs, the White House explains, “...defaulting on our government’s debt could reverse the historic economic gains that have been achieved since the president took office: an unemployment rate near a 50-year low, the creation of 12.6 million jobs, and robust consumer spending that has consistently powered a solid, reliable growth engine.”³⁹ This means that, overall, less money is moving through the economy. Ultimately, that ends in a severe reduction of tax revenue collected and therefore pushes the U.S. government towards the downward spiral of default, less tax revenue, and therefore more default.

5.6 International Influence

The international ramifications of passing the U.S. debt ceiling are multifaceted. Firstly, global financial system stability relies heavily on the assurance that the U.S. will uphold its debt commitments, as this belief is pivotal for the seamless functioning of the worldwide financial landscape. Failing to meet these obligations through a default could erode spender confidence and trigger disruptions across global financial markets.^61,⁶⁸ Secondly, the potential downgrade of the U.S. credit rating due to debt ceiling deliberations carries a broad global impact, influencing perceptions of economic solidity and subsequently affecting interest rates and investor assurance in various international markets.⁶⁹

Moreover, the global economic reverberations of a U.S. default are substantial, encompassing financial market turbulence, heightened borrowing costs, and the ominous prospect of a global recession.^68,⁷⁰ The aura of security surrounding U.S. Treasury securities amplifies the significance of preserving their stability, as any element of uncertainty in this regard could lead to reduced investor confidence, thereby impacting investment portfolios on a global scale.⁷¹

Beyond the economic realm, the integral role the U.S. assumes in international trade and diplomacy adds weight to debt ceiling discussions, as the potential economic instability emerging from such debates could potentially reshape global trade dynamics and diplomatic relationships.⁷²

Cognizant of these interconnections, the International Monetary Fund (IMF) has expressed concern about the adverse repercussions for the global economy if the U.S. fails to address its debt ceiling challenges, underscoring the intricate ties between economies.⁷³

Lastly, the potential fallout, marked by a market freeze and a consequential crisis, emphasizes that a default could not only disrupt the U.S. Treasury debt market but also lead to an international financial emergency.⁶⁸

5.7 General People

When the government reaches the debt ceiling, it cannot issue new debt to meet its financial obligations unless the debt ceiling is raised or suspended by legislature. Failure to raise or suspend the debt ceiling could result in a government shutdown or a default on its financial obligations, which could have serious economic consequences, especially for the general American. Indeed, if a debt default were to occur, “1/10 of all economic activity would stop” and “a severe recession would put an unquantifiable number of jobs for the low to medium income earner out of commission.”⁷⁴

This will specifically affect those depending on government paychecks as a debt crisis would cut off 1/6th of the population from assistance programs.⁷⁵

6. Solutions & Recommendations

6.1 Raising the Debt Ceiling

One viable strategy is raising the debt ceiling once again. Since 1960, Congress has intervened 78 times “to permanently raise, temporarily extend, or revise the definition of the debt limits.” Indeed, while the crisis has often come close to a catastrophe, bipartisan agreement occurs.⁷⁶

However, there is further risk to this solution. While raising the debt ceiling serves as a vital short-term solution, it also underscores the need for addressing underlying fiscal issues comprehensively. Continuously raising the ceiling acknowledges the practical reality of financing government operations, avoiding the pitfalls of a never-ending freefall toward default.

6.2 The Trillion Plat Coin

The proposition of utilizing a trillion-dollar platinum coin to address the debt ceiling quandary presents several compelling reasons for its viability. Firstly, its foundation in a legal loophole grants it legitimacy.⁷⁷ The Treasury Department's authority to mint platinum coins without debt ceiling restrictions offers a strategic avenue for funding government expenditures and sidestepping the threat of default.

The potential for immediate debt settlement is another key advantage. By minting such a coin, the government could swiftly amass a substantial sum,⁷⁸ which could then be used to liquidate debts, providing a prompt remedy to the debt ceiling impasse. The consequences of a debt default, including heightened borrowing costs, market turbulence, and credit rating deterioration, underscore the potential of a trillion-dollar platinum coin as a preventive measure against such turmoil.

Additionally, the notion of political deadlock avoidance comes to the forefront. Historical friction and partisan conflicts surrounding debt ceiling increases often precipitate extended negotiations and uncertainty. The concept of minting a trillion-dollar platinum coin circumvents this by furnishing a practical resolution that bypasses the necessity for legislative endorsement, thereby offering a pathway to resolution. Moreover, this approach introduces a window for deliberation. Leveraging a trillion-dollar platinum coin could furnish a temporary respite, enabling policymakers the time to engage in comprehensive discussions to address the core issues at the heart of the debt ceiling quandary.⁷⁹ It is pivotal to recognize that while the idea of a trillion-dollar platinum coin has sparked discourse and deliberation, its actual implementation remains a subject of debate and legal analysis. Any decision concerning its minting and the potential consequences it entails mandates meticulous consideration by policymakers and experts alike.

6.3 Bipartisan Cooperation

The intricate nature of the debt ceiling issue demands bipartisan collaboration to ensure economic stability, maintain the government's credibility, and safeguard the interests of stakeholders. By transcending partisan divides, policymakers can create an environment conducive to compromise, thus enabling the timely raising of the debt ceiling. Such collaboration not only ensures economic stability and credibility but also addresses broader fiscal challenges that impact the nation's long-term financial health. Middle-of-the-road solutions generally have terms that are either agreed upon by both parties as a form of compromise or are the general consensus, thus making them more feasible for execution and implementation.⁸⁰

A clear example of this is Joe Biden’s Fiscal Responsibility Act of 2023, which was signed on June 3rd of the same year. This bipartisan bill temporarily suspended the debt ceiling to ensure that the U.S. could fund all expenditures deemed absolutely necessary,³⁸ but it also cut spending in all departments of the federal government by revoking funds that were classified as unobligated. Additionally, it changed the way that federal revenues are earned and maintained- new measures include an increase in probate court possession claims and fees and budget caps were instituted to ensure the lowest possible expenditure.⁸¹ This plan is projected to reduce federal debt by 3 percent, from $46.7 trillion to $45.2 trillion - this significant decrease can strengthen the dollar.⁷

6.4 Eliminating the Debt Ceiling

The elimination of the debt ceiling holds the potential to address a range of pressing issues. Firstly, by removing the debt ceiling, the government would be safeguarded against financial disruptions, shutdowns, and the risk of defaulting that often arise from political disagreements over raising the limit.^82,83 Secondly, the consistent threat posed by the debt ceiling's presence can erode investor confidence and disrupt market stability. Thus, its elimination could enable a more stable economic environment.⁸³ Moreover, the constitutional concerns surrounding the debt ceiling could be mitigated by its removal as it has been argued that the ceiling contradicts the government's ability to fulfill its financial obligations, potentially addressing the long-debated question of its constitutionality.^84,85,86

Additionally, the elimination of the debt ceiling would curtail its usage as a political bargaining tool, encouraging fiscally responsible decisions that are less motivated by political considerations.⁸⁸ It is worth noting that while some experts contend that the debt ceiling might be unconstitutional under the Fourteenth Amendment due to its challenge to the legitimacy of the national debt, this matter remains untested and is the subject of ongoing legal discourse.^85,86,87,88

A recent example of this was when in 2013, Australia experienced extreme levels of economic downturn, resulting in elevated levels of debt that prompted them to continue raising the ceiling from $75 billion to $300 billion. However, when Treasurer Joe Hockey proposed an increase “from $300 billion to $500 billion,” both parties agreed to eliminate the debt ceiling altogether.⁸⁹

6.5 Issuing High-Interest Bonds

High-interest bonds are an extremely viable solution. Bonds are fixed-income investments that provide a fixed or predetermined stream of income in the form of coupon payments. The coupon rate, expressed as a percentage of the face value, determines the amount of the interest payment received by the creditor. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the investor would receive $50 in annual interest payments.⁹⁰

Bonds have specific maturity dates that indicate when the issuer must repay the principal amount to the bondholder. Maturities can range from short-term (less than one year) to long-term (up to 30 years or more). When the bond reaches maturity, the issuer repays the face value to the bondholder, and the bond ceases to exist.⁹¹

This brings about the question of how high-interest bonds, bonds that provide a higher interest, could play into helping to resolve the debt ceiling crisis we are facing. Simply put, if one outstanding bond has a value of $1,000, then the treasury department could sell it for $1,700. By raising the interest over time, it generates more value for investors, and when they subsequently buy the adjusted bond, the government is left with $700 in “profit”.⁹²

Even though this may seem like a viable solution on paper, it fundamentally exploits a loophole, so it is likely to face legal repercussions. Moreover, a solution like this is unlikely to get passed as it requires immediate implementation, which means that it is a last-resort option. However, if both parties can unanimously agree, it could be a better resolution rather than simply raising the debt ceiling.

7. Conclusion

As the U.S. approaches a debt default, an in-depth analysis of its potential effects is of utmost importance. This has led to increased public attention to the topic, but there is a lack of synthesized, holistic sources that analyze the impacts of the debt ceiling on all socioeconomic levels. This paper analyzed a series of sources from empirical studies to articles on public opinion to summarize the effect of the debt ceiling from local to international levels, its stakeholders in the government and the general public, and the possible solutions to prevent another crisis from occurring in the future. Most importantly, it connects different facets of the debt ceiling’s implications to create a comprehensive list of potential solutions and evaluates their viability with the hope of bringing transparency to the public regarding the technical implications of the U.S. hitting a debt default.

However, there are some limitations to this study. Being a meta-analysis study, this study relies on past information and sources rather than experimental information. Additionally, opinion pieces such as news articles introduce bias in sections regarding public opinion, which is necessary for the analysis but still creates a potential source of statistical distortion. Lastly, while it does evaluate the validity and reliability of sources, this study does not eliminate human error or shortcomings of the papers it examines.

Even so, we conclude that the debt ceiling ultimately has a minimal effect in preventing the U.S. from increasing levels of expenditures. Instead, the system creates an unnecessary stress and burden upon the government with the consequence being a risk of a global economic collapse. Due to the extreme impacts, it necessitates political action to either remove or revise the debt ceiling altogether. Moreover, governments and other relevant institutions must work swiftly before the debt levels hit the updated debt ceiling. To achieve this goal, legislators must work across the aisle and cooperate to achieve a consensus. Only through such solutions is the well-being of Americans secured.

1. Committee for a Responsible Federal Budget, 2023

2. Fay, 2021.

3. USAFacts, 2023

4. Bipartisan Policy Center, n.d..

5. Obama White House, 2010

6. Sahadi, 2011

7. Congressional Budget Office, 2023

8. International Monetary Fund, 2002

9. Horowitz, 2023

10. Shalifay, 2013

11. U.S. Congress, 2022

12. Lawder & Sullivan, 2023.