What could happen if US defaults on its debt?

President Joe Biden has less than two weeks to prevent the country from defaulting on its debt for the first time in history — which would lead to fiscal chaos for millions of Americans.

Monday afternoon he will meet with Kevin McCarthy at the White House to try to strike a deal to avoid a potentially catastrophic economic situation.

The US hit the $31.4 trillion debt ceiling in January and since then the Treasury Department has used what it describes as “extraordinary measures” to keep its balance sheet afloat.

Chancellor of the Exchequer Janet Yellen has warned that the government may not be able to pay all bills on time by June 1.

While Biden plans to raise the debt ceiling, McCarthy has maintained the bill will not pass Congress.

Both sides have doubled down on their demands. McCarthy wants stricter job requirements for federal aid programs and budget cats for six years. Biden only wants caps for two years and pushes for measures to increase revenue, such as taxes on wealth.

The GOP has already passed their own bill — the Limit, Save, and Grow Act — in the House, but it still has a long way to go through the Senate.

Progressive Democrats are also urging Biden not to consider tougher work requirements for benefit programs and have told him to consider using the 14th Amendment to declare the debt limit unconstitutional.

If a deal is not reached soon, the US will no longer be able to pay its debts, which spells catastrophe for households.

Experts say it could lead to the loss of seven million jobs – if debt persists for more than six weeks – investment plummets and mortgage payments skyrocket.

Here Dailymail.com explains the crisis and what it means for ordinary Americans…

What is the debt ceiling?

The debt ceiling is a limit on the amount the federal government can borrow. Currently it stands at $31.4 trillion – but this limit was reached on January 19.

The cap was introduced in the Second Liberty Bond Act of 1917. Most other countries have no cap. Denmark, for example, does, but it is so high that increasing it is rarely a problem.

The US runs budget deficits, meaning it spends more than it takes in through taxes and other revenues.

This includes spending on social safety net programs, debt interest and military financing.

Lifting the debt limit does not allow new spending, it only allows the US to continue financing its existing obligations.

President Biden will take on speaker Kevin McCarthy on the debt ceiling in their first talks on the issue in more than three months

What happens now?

Since the debt limit was reached, the Treasury Department said it was forced to rely on “extraordinary measures” to meet its obligations.

Such measures include the withdrawal of some government investments to ensure that bills remain paid.

But authorities are exhausting almost all options, meaning the money could run out on what’s known as the X-date. This could be as early as June 1, just over a week away.

The government can choose to lift or suspend the limit, which is currently Biden’s plan.

The debt ceiling used to be raised relatively regularly, but it has become an increasingly political issue.

If Congress fails to agree, the country will effectively run out of money and be unable to pay its bills.

What consequences does a payment default have for households?

Social Security payments can be suspended overnight if the country is unable to meet its debts.

About 66 million retirees, disabled workers and others receive monthly benefits that average $1,827 per month. About two-thirds of beneficiaries depend on social security for at least half of their income.

About $25 billion is sent each week, according to the Congressional Budget Office.

Other government payments could also be affected, including funding for food stamps and municipalities for Medicaid.

In addition, about two million federal civilian workers and 1.4 million active duty military could delay their paychecks.

McCarthy, with the weight of House and Senate Republicans behind him, insists there will be no clean debt ceiling bill to pass Congress

Investments can also take a hit. Even if the problem is quickly resolved before a default actually occurs, experts say stocks could lose up to a third of their value.

According to Moody’s Analytics, that would wipe out $12 trillion in family wealth in real terms.

And a default could lead to a rise in US Treasury yields to account for the increased risk.

Treasury yields generally set the benchmark for interest rates, loans, credit cards and mortgages.

It means that the repayment rates on all these loans could increase even further.

Finally, a debt default could trigger an economic collapse.

If the bankruptcy continues for a week, nearly a million jobs would be lost, according to Moody’s Analytics.

But if it lasted six weeks, more than 7 million jobs would be lost, pushing the unemployment rate above 8 percent. Many of these would be in the financial sector after it has been rocked by plummeting stock prices.

The effects of this would still be felt a decade from now, economists at Moody’s said CNN.

Has the US ever been in this position before?

The US has never defaulted on its debts in history, so it’s hard to know exactly what will happen.

In 2011, the country found itself in a similar crisis under Barack Obama, who also faced a Republican House against raising the ceiling.

While the ceiling was raised, the threat of default was enough to shake US financial markets and as a result, the US saw its credit rating fall from AAA to AA+.