In January of 2023, the United States reached its debt limit of $31.4 trillion. This most directly impacts the government’s ability to fulfill their financial obligations, as they will need to increase their debt to continue making payments. But it also has the potential to shake U.S. businesses and households, in addition to the global economy if the limit is not raised in the next few months. Economists and politicians are largely split in their opinions on what needs to be done to steer the U.S. economy away from a 2008-like crisis, but they are in agreement that the clock is ticking. 

While Republicans think an increased debt limit needs to be accompanied by drastic spending cuts, Democrats and Biden’s budget proposal are evidently more geared towards tax increases. Though, economist Mark Zandi predicts that the immense spending cuts that would appease Republicans would lead to a recession into 2024 and would lead to 2.6 million in job loss, says the New York Times. 

The New York Times explains that Republicans may be on board with aspects of Biden’s proposal, particularly the portion on military spending. Biden plans to increase military spending by 3.2 percent into 2024 that would go towards support for Ukraine and “nuclear deterrent” technologies. Another point of agreement for both parties is in regard to competition with China, where Biden proposes a $9.1 billion investment towards weapons to protect U.S. allies, according to the New York Times. 

Regardless of conflicting interests and opinions, the United States needs to reach an agreement quickly. Wall Street Journal explains that following the U.S. reaching its cap in January, the Treasury has been able to “deploy special accounting maneuvers” that will allow the government to continue fulfilling its payments. But this backup plan will not last forever, and they may face defaults by summer 2023 if Congress does not take action soon. CBS News explains that the date of default has been deemed Date X. 

Confidence in the Treasury and the overall U.S. economic system has been and will continue to be a fundamental indicator of how Date X will play out. The general consensus is that no one truly knows what will happen on Date X, especially regarding the state of the economy, but Brookings Institution explains that the confidence of investors in the ability of the Treasury to fulfill interest payments and not default on securities will be a massive contributor to the severity of Date X. We have seen this play out before, most recently with the Silicon Valley Bank failure and in 2008. People lose confidence in the financial system and rush to pull money from banks, creating a positive feedback loop of runs and further decaying of trust in the financial system. The implications of Date X could be much worse than what economists are predicting and may be worse than any recession we have ever seen. The unknown facets of Date X should be enough to push the House towards a decision. 

It is important to consider how a looming Date X might impact the average American. According to CBS News, the U.S. economy would fall into a recession that would lead to high unemployment and a large hit to stock and bond markets. Though, they draw on economist James Galbraith to note that Social Security has never defaulted since its establishment, and argues that even in the case of Date X, the U.S. should still be mandated to satisfy “Social Security, Medicare, Medicaid and interest payments.”

Additionally, CBS News describes U.S. debt as the “bedrock of the global financial system” which would mean that we would see an international impact that threatens the economic stability of other nations, similar to the 2008 financial crisis. 

The U.S. Department of the Treasury explains that raising the debt limit is not a rarity. Conversely, they share that “Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents” since 1960. Therefore, reaching the debt limit is not some extraordinary event at this point in time. But if action is not taken by Congress to raise the borrowing cap or come up with a comparable solution by Date X, the impact will be detrimental and global.