Treasury Secretary Janet Yellen has said the U.S. risks “widespread economic catastrophe” if Congress fails to raise or suspend the U.S. debt limit. JPMorgan Chase CEO Jamie Dimon recently noted that a scenario where the U.S. defaults on debt is “potentially catastrophic.”
These are not wildly exaggerated claims. If the U.S. defaults on its debts, not only would the global markets be thrown into turmoil, at home, millions would see invaluable resources dry up overnight.
The U.S. hit its borrowing limit in August, and since then, the Treasury Department has been moving money around to try to cover its obligations, a process that’s called “extraordinary measures.” But that dance won’t last much longer. If lawmakers fail to act, the Treasury will eventually run out of extra cash on hand after which it will be unable to meet approximately 40% of all payments, according to the Bipartisan Policy Center.
This would happen between Oct. 15 and Nov. 4, although Yellen estimates it will likely be by Oct. 18 in her latest update to Congress. Although it's difficult to pinpoint exactly when the U.S. will be facing the crisis, the potential impact is more clear-cut.
“Every item of federal spending is going to be affected—whether you're talking about payments that individuals receive, federal benefits, paychecks to civilian and military employees, grants to state and local governments—all of these are going to be touched,” says Paul Van de Water, senior fellow with the Center on Budget and Policy Priorities, a think tank.
Every. Single. Program. That means everything from Social Security payments to Medicaid and Medicare reimbursements and even Head Start grants to pay teachers and staff could experience delays and service adjustments, Van de Water tells Fortune. Additionally, about 3 million government workers and 1.4 million military members could have their paychecks delayed.
Social Security alone could account for delays for an estimated 65 million beneficiaries. Social Security does have its own trust fund, but the Treasury could be prevented from paying benefits on time. And Oct. 20 marks a major payout—that’s when Treasury is scheduled to make $20 billion in payments to recipients.
States would be particularly vulnerable if the Treasury Department runs out of funds before Congress raises the debt ceiling since federal funding accounts for nearly a third of state spending nationally. That’s especially true for Medicaid, but also funding for schools, affordable housing, clean water, road construction, public transit, and other transportation projects.
And currently, the Treasury Department has no plans to prioritize who’s getting paid first once the cash runs out. “The United States is a nation that pays all its bills on time. The only way for the government to address the debt ceiling is for Congress to raise or suspend the limit, just as they’ve done dozens of times before,” Treasury spokesperson Lily Adams said in a statement.
In fact, deciding what bills to prioritize would be “all but impossible,” according to a recent report from Moody’s Analytics. “The Treasury could not sort through the blizzard of payments due each day,” the report noted. Instead, it’s more likely that Treasury would simply delay all payments until it received enough cash to pay a specific day’s bills.
And that’s just the effect on government programs. Failing to raise the U.S. debt limit in time could also impact Treasury bills, global markets and even the overall U.S. credit rating.
Considered one of the world’s safest investments, the U.S. government currently pays a fairly low interest rate on U.S. Treasuries. This low interest rate translates into interest savings for the federal government of about $700 billion over the course of a decade, according to the Brookings Institution. But if the U.S. defaults, those interest rates could rise dramatically.
In 1979, the Treasury missed payments on Treasury bills maturing that spring. Even though it was only a small, inadvertent delay, Moody’s reported that T-bill yields initially jumped by 60 basis points and remained elevated for several months thereafter. “The cost to taxpayers was ultimately in the tens of billions of dollars,” according to Moody’s.
Overall, the debt ceiling debate also creates a lot of uncertainty and instability, which can have an effect on overall GDP. Moody’s estimated that the political brinkmanship over the debt limit in 2011 and 2013 cost the U.S. 1% in GDP growth and 1.2 million jobs. Credit rating agencies have also warned that defaulting could force a downgrade of the U.S.’s ‘AAA’ credit status, similar to what happened during the 2011 debt limit negotiations —an event led to a sell-off now known as Black Monday.
Despite all that’s riding on Congress raising the debt limit, President Joe Biden on Monday said that he couldn’t guarantee that lawmakers will reach a deal. “That's up to Mitch McConnell," he said. "I can't believe that that would be the end result, because the consequences are so dire. I don't believe that, but can I guarantee it? If I could, I would, but I can't."
Senate Minority Leader Mitch McConnell (R-Ky.) on Monday sent a letter to Biden confirming his stance that Republicans would not vote to raise the debt ceiling and called on the president to marshall his party. “Your Democratic majorities have no plans of their own to avoid default,” McConnell wrote. "Republicans' position is simple. We have no list of demands. For two and a half months, we have simply warned that since your party wishes to govern alone, it must handle the debt limit alone as well," McConnell said.
Raising or suspending the debt limit used to be a fairly routine thing. The debt ceiling has been changed over 100 times before since its inception, most recently in 2019 Congress suspended the debt limit for two years in a bipartisan vote. And most experts expect it will be raised again.
But this time some policy watchers are feeling a bit more antsy, says Van de Water. “Those of us who've been close to the budget process for many years feel that for whatever reason, it seems to be a more fluid situation and has been in the past,” he adds.
This story was originally featured on Fortune.com