Concerns over a potential debt default are mounting both in the US and across the globe. Recent developments in the debt ceiling negotiations have led leading economists to question whether the US can meet its financial obligations.
President Joe Biden has been facing increasing pressure for action. This escalated on Friday after Republican leaders walked out of the negotiation meeting. Republican leaders blamed the White House negotiators for holding up discussions. [Source]
Another cause for concern is President Biden canceling his trips to the Papa New Guinea to focus on the debt ceiling negotiations. This has strained relationships with an important player in the Pacific. [Source]
How has this started? And why is it such a big issue now?
The anxiety around the negotiations stalemate started with the Treasury Secretary Janet Yellen’s update on Monday. She claimed that the Treasury Department has been using extraordinary measures to help pay the bills since the US hit the $31.4 trillion debt ceiling in January. [Source]
Yellen warned the White House that the US might not be able to borrow the money it needs to pay its bills as soon as June 1.
Could June 1 be the first time the US defaults on its debt?
The debt ceiling is the maximum amount of debt that the US can sustain. It’s the nation’s credit limit set by Congress. Every so often, it’s necessary for lawmakers to raise this limit to ensure that the country can meet its financial obligations. The increase is usually accompanied by significant spending cuts.
And this is where the current negotiations have become a tug-of-war. Biden and the Democratic party want a straightforward increase in the debt limit. With the intention to prevent a default and pay the country’s bills.
Republicans won’t grant Biden’s request for a debt increase without adequate fiscal responsibility. They are demanding that any increase be coupled with spending cuts. Arguing that unchecked spending can lead to economic instability. [Source]
The consequences of a debt default are dire. Defaulting on the federal debt could lead to an economic catastrophe around the world. It would undermine trust in the US dollar, disrupt global commerce, and ignite an international crisis. [Source]
Mark Zandi, a chief economist at Moody’s Analytics, predicts that a week-long breach of the debt limit could wipe out roughly 1.5 million jobs. If the default lasts much longer, the US could lose as many as 7.8 million jobs. And the stock market could see a plunge, erasing $10 trillion in household wealth.
President Biden has been unwilling to meet House Speaker Kevin McCarthy’s terms. Knowing well that spending cuts in food stamps and Medicaid will not sit well with his voters. [Source]
McCarthy has been adamant about his terms. He wants any debt increase to be coupled with work requirements for entitlements. Republicans are asking for stricter work requirements in the Temporary Assistance for Needy Families, the Supplemental Nutrition Assistance Program, and the Medicaid program.
These are the terms that President Biden can’t accept. Many of his supporters rely on these programs. Any spending cuts in the programs decrease his chances of reelection.
For Republicans, this isn’t just about the debt limit. It’s about the fiscal path the country is on. If the US can’t manage its finances responsibly and ensure its debts are honored, it will undermine the dollar’s position and disrupt the global financial order.
Moving forward, finding a resolution to the debt ceiling crisis will be a critical challenge for the Biden administration. A failure to do so by June 1 could potentially kickstart a painful recession.
Biden’s attempts to broker a deal have so far been unsuccessful. Biden’s administration has been considering potential ways around the deadlock. Such as invoking the Constitution’s 14th Amendment. A controversial move that has never been done in the history of the US.
This amendment, ratified in the aftermath of the Civil War, contains a clause stating, “The validity of the public debt of the United States, authorized by law, shall not be questioned”.
The uncertainty surrounding this course can sidestep the need for Congressional approval, but it could also lead to litigation. This means that the risk of default would persist even if Biden invokes the amendment.
As the deadline approaches, the pressure for action is growing. All eyes are on President Biden to see what steps he will take to navigate this crisis. The global economy is currently grappling with geopolitical unrest and is in a fragile state. The debt ceiling crisis adds risk to an already uncertain landscape.
Americans who value their country’s economic stability and global standing are hoping that our leaders can overcome their political differences and make the right decision for the nation’s future.