Washington.
To avoid default, President Joe Biden needs Republicans in Congress. Are they risking the bankruptcy of the US?
The US has them statutory debt limit from the current 31.4 trillion (one thousand billion) dollars. The US Treasury Department has now begun to take “extraordinary measures” to prevent an overrun and possible default. If the White House and Congress (House of Representatives and Senate) fail to agree on raising the debt limit, the US could bankruptcy for the first time in its history experience. The consequences for the markets and the stability of the entire financial system would be devastating.
The drama seems to repeat itself every few years in Washington: politicians talk about the need to save and reduce new borrowing. But then the opposite happens. Every year a new budget deficit, the hole in the state treasury is getting bigger and bigger, and the Treasury keeps approaching the so-called “debt ceiling”i.e. the “debt ceiling”.
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If that limit is exceeded, the Treasury would be unable to make interest payments or pay investors whose government bonds are maturing. These can be large investment companies, private citizens, other states or even central banks that hold US government bonds.
USA: Debt limit dates from 1917 – WWI
The irony of the political dilemma is that Congress passed this debt limit in 1917 to achieve the exact opposite: during World War I, the issue was not about austerity. Rather, in times of war, the state should have the flexibility to spend money without the need for a new law each time.
As a result, several generously endowed individual budgets were passed, which in any case were never exhausted and which the government could use without the approval of Congress.
The country and Congress are more divided than ever
On Thursday evening it was time again. The state had once again reached the limit of its ability to pay. Increasing, suspending, or repealing the limit would be possible with a simple majority vote in Congress. But with the country and Congress more deeply divided than ever before, negotiations have fizzled out.
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The Republicans, led by their new majority leader Kevin McCarthy, only want to approve a higher limit if President Joe Biden and the Democrats agree to massive savings. They are demanding cuts in statutory pension insurance and state health care programs. One, “Medicare,” is health insurance for retirees, while “Medicaid” covers poorer households who cannot afford doctor visits and medication.
Talks with Republicans are deadlocked
However, the White House refuses to cut back on these “sacred cows”. Government spokeswoman Karine Jean-Pierre said government spokeswoman Karine Jean-Pierre said that legally guaranteed spending programs and the debate about the debt ceiling “should not become a political game”. McCarthy replied that the Democrats, with their spending programs, had again turned out to be “wasteful liberals” who were unable to get government finances under control. “I see no reason why we should allow such behavior to continue,” the Republican said.
With talks deadlocked, it is now up to Treasury Secretary Janet Yellen. It has tools that would allow the Treasury to stay liquid for a few more months. For example, the minister could temporarily suspend the issuance of government bonds administered by states and municipalities. It would also be possible for Yellen to temporarily tap into the pension funds of federal employees.
Finance Minister Yellen is trying to stabilize the finances with arithmetic tricks
Another alternative would be for the Treasury to suspend the reinvestment of bonds held in the so-called Exchange Rate Stabilization Fund (ESF). In the worst case, President Joe Biden could even order a $1 trillion “coin” be minted, which would then be used to pay down the national debt. However, Yellen dismissed this option as a “gimmick”.
According to the finance minister, these mathematical tricks would be sufficient until around June to prevent a state bankruptcy. But Yellen also knows how intransigent the Republicans are, especially against the backdrop of a right-wing wing of the party that is gaining influence. As a result, she called on Republicans and Democrats to “agree swiftly on raising or suspending the debt limit,” otherwise “considerable uncertainty” threatens.
President Obama also paid a high price at the time
The USA already experienced what that can mean in the summer of 2011. For the first time in history, the rating agency Standard & Poor’s downgraded the creditworthiness of US government bonds. The financial markets collapsed, investors lost confidence in the economic power of the USA, the dollar began to plummet and experts warned of a global recession.
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It was only possible to prevent worse from happening when then-President Barack Obama and the Democrats agreed to forced budget cuts in exchange for a higher debt limit. Experts warn that if the negotiations in Washington don’t get any further, real financial Armageddon is looming this time against the background of high interest rates and geopolitical uncertainty.
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