Spencer Finley

Business & Science Editor

sjf5814@psu.edu

In testimony before Congress on September 28th reported on by NPR, Treasury Secretary Janet Yellen stated that the United States was mere weeks away from facing an unprecedented financial crisis. According to NPR, Yellen said that if Congress does not act to raise or suspend the debt ceiling by October 18th, 2021, then the United States would, for the first time in its history, be on track to default on its national debt, causing not only a national financial catastrophe, but likely a catastrophic global financial downturn.

The crux of the crisis is this: the national debt ceiling is the amount of money that the United States is legally allowed to take out to pay its existing financial obligations. Raising the debt ceiling would not increase the amount of expenditures that the United States government would be able to make; rather, it would merely allow the government to pay for spending from previous years. Currently, congressional Republicans are vowing to block any attempt to raise the debt ceiling because, to quote Senate Minority Leader Mitch McConnell, “There is no chance Republicans will help lift Democrats’ credit limit so they can immediately steamroll through a socialist binge that will hurt families.” 

This is a dramatic mischaracterization of what the debt ceiling is; McConnell is insinuating that the Democratic party is trying to raise the debt ceiling so that they can pay for new social programs; the reality of this situation is that efforts to raise the debt ceiling are simply edits to keep the United States economy afloat, along with the economies of countries invested in or doing business with the United States. This is because the United States defaulting on its debt would destroy faith in the U.S financial system and cause a raise in interest rates for the federal government, which would in turn be passed on to taxpayers, potentially in the form of higher inflation and greater taxes. 

Additionally, this could result in social security payments, soldiers’, defense contractors’ and federal employees’ salaries and child tax credits not being paid out by the federal government. 

The effect that this would have on global financial markets would be profound as well; as we live in an increasingly globalized economy, what happens in one country, especially one of the world’s premier superpowers, affects a significant number of other countries. According to the Council on Foreign Affairs, the United States defaulting on its debt would mean that foreign governments and firms which own US securities would be lowered, at least temporarily. Additionally, as the United States is a leader of world trade, any domestic slowdown would have the potential to spread to other countries. 

Take, for example, the 2008 Financial Crisis. Although the 2008 crisis originated in the United States, according to the International Monetary Forum, it has had lasting negative effects on the global economy. According to the IMF, it resulted in not only greater unemployment in many countries, but greater income inequality, greater public debt, and a buildup of financial vulnerabilities in many industries with relatively little government oversight.