University of Wisconsin Eau Claire professor explains debt ceiling

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EAU CLAIRE, Wis. (WLAX/WEUX) – The economy could face catastrophic consequences if the government fails to raise the debt ceiling by October 18. That’s according to U.S. Treasury Secretary Janet Yellen.

She says the government has once again reached its borrowing limit.

First News at Nine’s Max Cotton explains what the u-s defaulting on its debt could mean.

“The debt ceiling is a constraint that Congress has placed upon itself that limits the total amount of borrowing that it effectively can do. So it is not an economic constraint, it is a legal constraint,” UW-Eau Claire Economics Department Chair Thomas Kemp said.

The U.S. has hit the debt ceiling many times before. Each time the government raised its borrowing limit allowing it to sell more treasury bonds to pay to current debts.

If the government does raise the debt ceiling, the country will default.

“Pretty much our entire financial system, and of course, notably, the U.S. dollar, is founded upon the idea that the U.S. government redeems, or pays, its debts,” Kemp said.

He compares the debts to an “I owe you.”

The U.S. government has always kept these financial promises.

Kemp added since the U.S. has never defaulted, nobody knows exactly what will happen. However, he guarantees it’ll create plenty of uncertainty in the financial system.

“Uncertainty is expensive so you would expect a lot of volatility to result until such time as the uncertainty is gone,” Kemp said. “In other words, when people are unsure about what the markets are going to do, the price is going to move all over the place, price of everything. And it’s going to keep moving all over the place until people know what’s going to happen again.”

He said one positive sign is markets are currently staying stable, which means they don’t expect the U.S. to default.

Monday, the U.S. Senate voted down potential legislation raising the debt ceiling. Sen. Tammy Baldwin, D-Wisconsin, voted for the measure. Sen. Ron Johnson, R-Wisconsin, opposed it.

In a statement, Baldwin said:

“I voted to fund the government, prevent a shutdown, and avoid a default on paying our bills, but Senate Republicans have filibustered and obstructed. Mitch McConnell is playing a political game with the full faith and credit of America and our economy. Trying to force the first-ever default of the United States will have a real impact on people who depend on Social Security, or working families who are benefiting from Child Tax Credit payments. Senate Republicans are the party of default and it is beyond irresponsible and dangerous.”

Johnson also released a statement following his vote:

“Democrats are in control of the executive and legislative branches of government. As they demonstrated in passing massive spending bills on a purely partisan basis, they are fully capable of increasing the debt ceiling without Republican votes. I drafted a letter that 46 Republican senators signed in early August giving Democrats fair warning that they would not receive Republican help in raising the debt ceiling to accommodate their partisan deficit spending. Inflation is wiping out wage gains, deficit spending is mortgaging our children’s future, and Democrats need to take responsibility and be held accountable for adding trillions of dollars more to our national debt.”

Yesterday, the U.S. Senate rejected proposed legislation raising the debt ceiling.

Wisconsin Democratic Senator Tammy Baldwin voted for the measure. Republican Ron Johnson opposed it.

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