US debt containment struggle leads to catastrophic default worries
Experts warn that the US will fail to meet its financial obligations in the coming weeks unless Congress decides to increase the amount the US Treasury Department can borrow beyond its current debt of $ 28.5 trillion . to do.
Few experts believe it can happen, but if so, it can cause economic disaster with ramifications well beyond the American coast.
In a letter to Parliament last week, Treasury Secretary Janet Yellen warned of the damage that would result if the US could not pay the bill in a short period of time.
“A delay in questioning the federal government‘s ability to meet all of its commitments is likely to cause irreparable damage to the US economy and global financial markets,” wrote former Federal Reserve Chairman Janet Yellen. Rice field. “It would be especially irresponsible to compromise the full trust and credibility of the United States when US families, communities and businesses are still suffering from the effects of the ongoing pandemic.”
As the crisis looms, Democrats and Republicans in Washington argue over who should take responsibility for the politically unpopular mission of raising the debt ceiling, commonly known as debt containment. Republicans, led by Senate Minority Leader Mitch McConnell, vowed no one would vote to raise the ceiling.
Democrats say much of their increased debt spending is the result of policies passed by Republican-led parliament and signed by Republican President Donald Trump. Hence, they argue that Republicans should participate in the increase in restrictions.
“America should never give up”
The strange thing about the current debate is that there is no disagreement between the parties about what should happen. In an interview with Louisville Courier Journal Last week, in his home state of Kentucky, McConnell declared that “America should never fail” and “we need to raise our debt ceiling.”
But McConnell said Republicans wouldn’t vote for it. He calls on the Democrats to unilaterally raise their debt limits through a process called “budget adjustment”. This will prevent Senate Republicans from blocking the vote on the bill.
McConnell’s position offended the Democrats. The Democrats have noted that President Trump’s four-year debt ceiling has been suspended three times, each time the Democratic Party acknowledged an increase in debt.
Possibility of house voting next week
California Democrat Nancy Pelosi has denied the possibility of adding a debt ceiling hike to the settlement package, creating what appears to be a deadlock on Capitol Hill.
On Friday, Maryland Democratic Chairman Steny Hoyer said the House of Representatives would vote next week to raise the debt ceiling. House Democrats can choose to tie debt restrictions to spending bills that must prevent the government from closing at the end of the fiscal year on September 30, adding to the importance of the Republican opposition.
If the House bill is passed, it will move to the 50-50 Senate, where Vice President Kamala Harris can vote for a tiebreaker, giving the Democratic Party a majority. However, such measures are vulnerable to Republican filibusters if GOP lawmakers block them.
“Who will blink first?”
Many in Washington believe that debt ceilings will be raised before the United States defaults, but I’m not sure about the mechanism. Nevertheless, in the past the legislature was dangerously close to default. In 2011, when the House of Representatives Republicans were battling Democratic President Barack Obama over the national debt, the rating agency Standard & Poor’s announced the first downgrade of US Treasuries, sparking a big sale.
Mark Goldwayne, senior vice president and senior policy officer of the Responsible Federal Budget Committee, a government spending regulator, said, “In the end, politicians will somehow raise or suspend debt ceilings. The United States cannot and will not default so someone is going to be upset. The question is who flashes first? “
There are several ways to do this, according to Richard Kogan, Senior Fellow of the Center on Budget and Policy Priorities.
“Parliament can decide to increase the debt ceiling or a new suspension, and the amount of the increase or the length of the suspension can be contentious,” he said. “Parliament might decide to add other terms that have not been the norm in recent years for good reason, and for political reasons, Republicans in Congress can allow that, but Democrats can only allow it by voting. “
New borrowing required
Until August 2, the country operated under the latest series of debt ceiling suspensions that would allow the Treasury Department to issue new debts without restrictions. When the suspension was lifted, the national debt reached an estimated $ 28.5 trillion.
That represents an increase of around $ 6.5 trillion since 2019, when the restrictions were last suspended, and an increase of around $ 8.6 trillion since the suspension went into effect in the Trump administration‘s early months.
Most of the federal debt surge since 2017 has taken place under the Trump administration, which was largely signed by President Joe Biden, mostly in the Pandemic Relief Act.
Since August, the Treasury Department has been working on a series of “special measures” to avoid a default without additional borrowing. However, Treasury officials say these measures will not be sustainable until the end of next month.
The Biden administration is trying to increase political pressure to force McConnell and the Republicans in Parliament to participate in raising the debt ceiling.
On Wednesday, Yellen spoke to McConnell on the phone. The White House said the purpose of the call is to “convey what the enormous risk of default is”. However, a McConnell spokesman revealed the conversation hadn’t moved Republicans.
“The Führer has repeated what he has said publicly to Yellen since July,” said a spokesman. “You will have to raise your debt ceiling yourself, and you have the tools to do so.”
On Friday, the Associated Press reported that the government had contacted state and local governments to warn of possible disruptions in federal funding if restrictions were not increased.
Debt limit history
Debt limits are not meant to be political clubs. Its origins go back to the First World War. With Congress pre-approving certain amounts of debt, the Treasury Department no longer needs to get Congressional approval every time it needs to issue a new bond.
The debt limits have been raised several times since its inception in 1917. According to the Treasury Department, Congress has “raised, temporarily extended, or revised the definition of debt limits” 78 times since 1960.
With federal borrowing accelerating, raising debt limits has become a political weapon in recent decades.
US debt containment struggle leads to catastrophic default worries