A debt default by the United States government is likely to occur in the second half of 2023, says Ralph Axel, a rates strategist at Bank of America. This would be the first time in history that the US would default on any of its obligations due to the debt-ceiling law.
A debt default by the United States government is inevitable if the claims of Ralph Axel come out to be true. The far-right wing of the Republican Party holding sway in the House of Representatives is the primary concern for investors.
Axel believes that by late summer or early fall, the federal government will temporarily be forced to default on a portion of its daily obligations from a couple of days to a few weeks.
What is the Debt Ceiling?
The debt ceiling, which is established by the legislative branch, indicates the highest amount of debt the government is permitted to take on to cover its financial obligations. If the government’s debt reaches that limit and legislators don’t increase the borrowing limit, the US may be unable to meet its financial commitments and may default. It’s noteworthy that when Congress raises or postpones the debt limit, it isn’t approving extra spending, it is permitting the Treasury to pay for expenses that have already been authorized.
Has the debt limit ever been raised before?
On multiple occasions, Congress has taken action to raise, temporarily extend or change the definition of the debt limit. The Treasury Department reports that since 1960, the debt limit has been changed 78 times. Republican presidents oversaw 49 of these changes, and Democratic presidents oversaw 29. The most recent alteration of the debt limit was in December 2021, when the Democratic party held a majority in both the House of Representatives and the Senate.
What happens if the United States government defaults on its debt?
A default by the United States on the trillions of dollars it owes, something that has never occurred in the country’s history, could have severe consequences, according to some economists. Since U.S. debt is considered the foundation of the worldwide financial system, partly due to its stability, a default could affect economies around the world. American citizens might also experience a recession with higher unemployment and stock and bond markets may drop significantly. Federal benefits recipients such as Social Security beneficiaries may not receive their monthly payments.
However, the exact impact of a default on the economy is uncertain and depends on various factors. The economic effects of running out of available resources to meet federal government obligations would certainly be negative, but we note there is a high degree of uncertainty about the speed and magnitude of the impact the U.S. economy would incur. Ultimately, it would depend on how long the breach persists, how Treasury manages the situation and how financial markets react.
Ralph Axel also predicts that such an event would include a fall in equity and bond prices, potentially testing Treasury market functioning and liquidity. However, he also thinks that Treasury would quickly announce a payment prioritization plan that should protect debt from defaults and calm markets.
