Consumer Alert: The debt ceiling and default explained

ROCHESTER, N.Y. Negotiations about raising the nation’s debt ceiling hit a stalemate again on Friday.

On Thursday evening, House majority leader Kevin McCarthy was optimistic. That was then. This is now. After an hour-long discussion behind closed doors, negotiators said they were making no progress and needed to quote “press pause.”

Republicans want steep spending cuts before they’ll agree to raise the debt ceiling. Democrats disagree, arguing that raising the debt ceiling should not be tied to program and policy decisions. And the day of default looms large. Treasury Secretary Janet Yellen says it could happen as soon as June 1.

So what is the debt ceiling anyway? Let’s go in depth. The debt ceiling is the amount of money Congress agrees the U.S. can borrow. Right now, the country’s debt is more than $31.4 trillion. The debt ceiling is just over $31.3 trillion. Clearly, we’ve already passed the debt ceiling, so Yellen says she’s made a variety of accounting maneuvers to keep us afloat.

But she warns that by June 1, we could default on our debt. The interest payments on our country’s debt are estimated to be about $395.5 billion. If we can’t make interest payments, it would be the first default in U.S. history and could be catastrophic.

Here’s why. Right now, U.S. treasury bonds are considered one of the safest investments in the world. Default could mean those bonds could lose value, making us poorer and causing a recession felt around the world. For example, Japan holds $1.1 trillion in U.S. treasuries. A devaluation of those treasuries would have a profound effect on them as well.

And think about your 401k. You likely have a mixture of stocks and bonds. Bonds don’t yield as much, but they’re considered one of the safest investments in the world. If those bonds are considered less safe because America has defaulted on its debt, your retirement nest egg suddenly would shrink.

But the ramifications go much further than your personal investments. Banks use bonds to balance riskier investments. Corporations do as well. The domino effect could be devastating.

This is what many economists are speculating. We can’t know for sure because it’s never happened before. And Congress knows it cannot happen now.