You may know that the U.S. has reached its debt limit again (roughly $31 trillion). What exactly is the debt? Press the play button to find out.
The government raises its money from taxes, supplemented by debt in the form of government bonds – Treasury bonds and bills. By incurring debt, the government is actually creating investment opportunities for individuals, companies, and other governments. But this brinkmanship is somewhat dangerous.
The biggest problem would come when the government is eventually forced to stop making interest payments on government bonds. That would be considered a default on our sovereign debt, and when the issuer of the world’s reserve currency defaults, it would (potentially catastrophically) undermine confidence in the world’s total financial system. Incidentally, it would also cut off the yields for everybody who holds Treasury bonds or bond mutual funds (or ETFs) in their retirement portfolios. There could even be a selloff of government bonds, if the standoff lasts into the summer, that could also trigger a dramatic surge in interest rates. The stock market could plunge – probably temporarily – until the debt ceiling is finally raised and the government is allowed to spend the money that Congress allocated in the first place.
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