Tri-State economist reacts to US reaching national debt limit

EVANSVILLE, Ind. (WFIE) - As the national debt reached its ceiling on Thursday, lawmakers continue to feud over the national budget as the high-stakes fight has some people concerned the U.S. could default on its debt for the first time in history.

[READ MORE: US Treasury buys time for Biden and GOP on debt limit deal]

As the national debt hit its $31.7 trillion ceiling, U.S. Treasury Secretary Janet Yellen issued a letter to Congress detailing that the measure they were taking to keep the nation financially stable would only be effective through June 5.

Matt Finn, chief economist for Old National Bank, says that may be a conservative guess.

“Realistic estimates would suggest that it’s probably mid-August,” Finn said.

Regardless of when the situation truly becomes dire, the clock is ticking to move the debt ceiling. Finn says the trouble is that Congress is at an impasse.

“We’ve got two things going on here, we’ve got the debt ceiling and we’ve got the budget,” Finn said.

Republicans, who hold a slim majority in the House of Representatives, are refusing to raise the debt ceiling unless Democrats agree to cuts in the national budget. Democrats are refusing to do that.

If the ceiling stays firm through the summer, the United States could default for the first time in history.

“Catastrophic is too strong a word, but it could potentially mean for a time, it would ultimately have to be resolved, but at least for a time if you owned a government bond, you may not get paid,” Finn said. “It may not be redeemed on time.”

It would also mean general instability for the nation’s entire economy.

Finn says it’s important to keep some perspective. These negotiations come at a more volatile time than in the past, but these talks do happen every few years.

“It happens every few years, and we seem to get through it,” Finn said. “But sometimes the brinkmanship can be worse than others. It’s a little bit more unusual in that is occurring just before we start that election cycle in 2024.”

Finn says most of the issues that could stem from a default affect investments and broader financial institutions.

In order to keep the government’s operations funded through the summer, the U.S. Department of the Treasury has done a few things.

Officials will start selling off existing investments and they will stop reinvesting in civil servant retirement and disability funds, as well as post office retirement funds.

This will not affect federal employees’ retirement funds because the money should be reinvested once the debt issue is resolved.

Until then, it’s now in the hands of the lawmakers.

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