With nine days remaining until the so-called “X date,” when the U.S. Treasury will run out of funds to meet its obligations, Congress is staring down the possibility of the nation’s first-ever default.

If the U.S. defaults on its debt, the Treasury will be unable to make payments, potentially ranging from retirees’ Social Security to servicemembers’ pay at Nellis or Creech Air Force bases. And the longer-term implications could be even more devastating, with a default likely triggering a downgrade of U.S. credit, a rise in costs and even a global recession powered by a weak dollar and job losses.

All of this can be avoided if negotiators representing House Speaker Kevin McCarthy (R-CA) and President Joe Biden can reach a deal. (For more information on why we have a debt limit, prior debt limit fights and the political forces underpinning the situation, read this January explainer.) 

But if a deal is not reached or passed in time, the economic calamity caused by a default could prove devastating in Nevada, which is still recovering from pandemic-era losses and, as a tourism-based economy, feels the pain of recessions extra sharply.

The U.S. has never defaulted, and the debt ceiling — created in 1917 — has been raised 78 times since 1960. Under prior administrations, including earlier in the Biden era and three times in the Trump era, Congress voted to raise the debt ceiling. 

This year, as in prior debt limit fights during the Clinton and Obama administrations, the Republican-run House is attempting to leverage the threat of default to sharp spending cuts and other GOP policy priorities, including stricter work requirements for social programs and rescinding funds from prior Democrat-backed appropriations.

Experts say the fate of the economy hangs in the balance. And even if a deal is reached in the days or weeks after a default, the impacts could continue to reverberate — from immediate payments missed to the weakening of the U.S.’ global financial standing.

“We have this amazing low unemployment rate, strong wage growth and economic investment going on at very high levels,” said Jean Ross, a senior fellow at the left-leaning Center for American Progress who studies fiscal policy. “That would be endangered.”

Immediate effects

Default — when the U.S. owes more money than it possesses — means the Treasury will have to choose which bills to pay versus which to let lapse. Though experts do not know for sure, payment on the debt and its interest is expected to be the first priority.

Direct payments to people — Social Security, veterans’ benefits, military pay, federal employees’ salaries, payments from Medicare and Medicaid to insurers or providers, food assistance — are most likely to be delayed.

Leon Borden, the president of the Retired Public Employees of Nevada, said state employees’ salaries and pensions are safe, as they come from the state. But for retirees who collect Social Security or veterans’ benefits, he’s concerned about those missed payments.

The federal government also sends money to the state through a bevy of departments — the state’s Medicaid program, department of education for schools, the Nevada Department of Transportation for highway operations, housing vouchers and to manage the millions of federally-owned acres overseen by the Bureau of Land Management.

Ross said she predicts services that flow through a state or local budget, such as education or transportation money, will continue to be delivered because the state or cities can cover the cost. Direct payments like Social Security, federal contractors’ salaries, military pay or disability checks are most at risk.

During a government shutdown — when the Treasury has sufficient funds but lacks the congressional authority to spend it — these federal payments stop and national parks, for example, shut down. The state fills in the budgetary gaps for items such as transportation and education, with the knowledge that once Congress ends the shutdown and passes the appropriations bills, they will include provisions to repay the states and federal employees for the work and funds they covered.

But in a default scenario, the Treasury has the authority to spend money. It just lacks the funds.

“It'll work almost exactly like a shutdown from a state perspective, but without the clarity that the Treasury will make good on the monies that are being expended by the state in the interim,” Nevada Treasurer Zach Conine, a Democrat, said. “By definition, if the [federal government] defaults, they're saying they're not willing to make good on their obligations.”

From a macroeconomic perspective, most of Nevada’s treasury assets including its college savings program and some of the permanent school fund, are tied up in U.S. bonds or other Treasury-backed instruments, typically thought of as the world’s most secure investment option. If the Treasury defaults, those assets will become impaired and the state’s borrowing capacity will be limited.

Conine said he has spent the last four to five weeks engaging in complex maneuvers to shield the state’s assets from impairment in the event of a default. 

Still, he’s deeply troubled by the situation — calling it a politically manufactured crisis that could be averted through passing a clean debt limit increase or removing a Congressionally handled debt limit altogether.

“The state will make less money during the period that we are preparing [for] to protect ourselves than we would have if this was not a problem,” Conine said. “When you see businesses and banks that aren't borrowing or lending at the level they were without worrying about this, [it] casts a shadow over economic development and investment … for a deeply stupid reason.”

Long-term financial standing

Much of Conine’s stress has to do with the long-term financial ramifications of a default.

The first consequence of breaching the debt limit would be a downgrading of the U.S.’ credit — something that happened in 2011 when Congress got close to defaulting but ultimately reached a deal in the eleventh hour.

Ross, from the Center for American Progress, said the next step would likely be a sharp rise in interest rates, given that federal securities underpin the interest rates for so many holdings, from credit card debt to small business loans to mortgages. 

The full faith and credit of the United States is “the cornerstone of all finance in the country and arguably the world,” Conine said. 

The implication is that the Treasury, as it always has, will pay its bondholders back on time, in full. That security is why interest rates for the federal government are so low. 

The state, Conine says, pays a slightly higher rate than the federal government, but at a slightly lower rate than a well-capitalized business, which gets better rates than a poorly capitalized business, which still receives better interest rates than an individual with a credit card, and so on. But each of these interest rates is set with the presumption that the Treasury, the best-financed part of the financial food chain, meets its obligations, with the risk of each successive entity priced in from there. 

So, if interest rates on the Treasury get raised, every downstream borrower will see their rates rise as well, Conine said.

He added that there are two immediate consequences of interest rate rises — impaired access to capital and a stock market freak out. Both could affect savings programs, such as the state’s retirement program.

“That will make it both harder for people to spend money and harder for people to make money,” Conine said.

And throughout all of this chaos, the federal government, a big piece of the economy, would be unable to make payments.

“You have to incur all of your costs while you're waiting, while a potential payment is delayed,” Ross said. “And that may be a hardship.”

Additionally, Ross said a credit downgrade could result in the value of the U.S. dollar falling, which could undermine the dollar supremacy that has guided global finance for decades and steadied business in numerous countries with unstable currencies. It could potentially leave a vacuum that well-positioned adversaries like China could fill.

Within the U.S., this could mean the cost of imports rise, making prices for goods and the cost of doing business go up. All of these price shocks are prime ingredients for a recession and, particularly, for job losses, as businesses cut costs as materials and financing become more expensive. 

A poor economy would be devastating to Nevada, Conine said — even if negotiators reach a deal soon after default. With credit card bills, food, mortgages and any other debt getting more expensive, a planned trip to Las Vegas or Lake Tahoe could be the first thing someone cuts from their tightened budget.

“People have less money for discretionary income,” Conine said. “And when people have less money for discretionary income, we feel it in Nevada.”

The political angle

As negotiations continue over Memorial Day weekend, a deal between both parties seems to hinge on the length and size of spending caps, the inclusion of new work requirements, whether to offset cuts with tax increases or other pay-fors, clawing back unspent funds and potential permitting reform.

Though Democrats initially called for a clean debt limit increase and want any discussion of cuts to go through the budget process as is typical, McCarthy could lose his speakership if members do not think he got adequate concessions through the use of the debt limit as a negotiating tool.

Rep. Mark Amodei (R-NV), the lone Republican in Nevada’s congressional delegation, said raising the debt limit without implementing spending cuts would amount to facilitating a financial crisis caused by what he sees as reckless overspending.

All of Nevada’s congressional delegation, including Amodei, voted to raise the debt limit in 2017 in conjunction with hurricane aid. Amodei and then-Rep. Jacky Rosen (D-NV) supported an increase in 2018 as part of a spending bill, but lost the votes of Rep. Dina Titus (D-NV) and then-Rep. Ruben Kihuen (D-NV), who unsuccessfully voted with then-Minority Leader Nancy Pelosi (D-CA) to try to stop the bill over a lack of protections for Dreamers. 

Congress again avoided a debt limit fight in 2019, this time during an era of divided government, by raising the debt limit as part of a budget agreement between Pelosi and Trump; Amodei voted against it, while all of Nevada’s House Democrats voted for it. Democrats in both chambers raised the debt ceiling in 2021 with only one House Republican joining them.

“When your credit card is maxed out, you don’t keep spending — you cut back,” Amodei said in a statement, echoing a typical refrain from McCarthy. “Well, the same is true for our national debt. America’s credit card is maxed out and we now need to make major spending reforms.”

But Conine said that’s the wrong analogy. Raising the debt limit authorizes the Treasury to pay for bills that it has already incurred through prior acts of Congress, including from the Trump and Biden administrations. 

“We went to a restaurant,” Conine said. “We ordered all the food. We ate too much. We ordered dessert; we ate too much. The choice there is to eat less the next time. It's not to skip out on the check.”

Any deal may ultimately come down to effective messaging. House Democrats have become uneasy with the existence of negotiations in the first place, having hoped that, as the “X date” got closer, Republicans would have to offer a clean debt limit increase rather than risk default. 

Several Democrats, including Rep. Steven Horsford (D-NV), have drawn a red line around new work requirements for social safety net programs, saying they will not support a deal making it more difficult to obtain food assistance or Medicaid.

The Congressional Budget Office projects that the work requirements would cause 875,000 Americans to lose either their Supplemental Nutrition Assistance Program or Medicaid benefits.

Horsford, in particular, lamented that Democrats have not done more negotiating in public. In a Friday press conference, he called on the President to use the bully pulpit to clarify the stakes of a default.

“Some of this is being shaped as if we’re not willing to find ways to cut areas of the budget,” Horsford said. “That’s simply not true. But what we’re not going to do is do it on the backs of working people, seniors, veterans, children, [and] people working hard to make ends meet.”

Meanwhile, dozens of Republicans who are part of the far-right House Freedom Caucus have threatened to withhold their support if the final agreement is anything short of the debt limit bill House Republicans passed in late April, a veritable GOP wish list that Democrats, who control the Senate and the White House, would never agree to.

Thus, any potential deal must include both Democrats and Republicans, meaning a bill, or perhaps its perception, cannot be so conservative as to lose the support of too many Democrats and play negatively for Biden going into his re-election campaign, while being sufficiently conservative to satisfy enough House Republicans into voting for the bill, or at the very least, not serving as the catalyst for a takedown of McCarthy’s shakily-obtained speakership.

In the meantime, the U.S. economy hangs in the balance. 

“I hope that all of this is [just] a fun intellectual exercise,” Conine said, “and I can look back on the two inches of hairline I’ve lost over the last couple of months thinking about this.”