[1/2] US President Joe Biden speaks with members of his “Investing in America Cabinet” in the Roosevelt Room at the White House in Washington, US, May 5, 2023. REUTERS/Leah Millis/
WASHINGTON, May 29 (Reuters) – The US is fast approaching the deadline for Congress to pass a deal, reached over the weekend by Democratic President Joe Biden and top congressional Republican Kevin McCarthy, to raise the $31 debt ceiling. 4 trillion from the government or risk a catastrophic default.
WHEN WAS THE DEBT CEILING REACHED?
Washington regularly sets limits on federal borrowing. Currently, the ceiling is approximately equal to 120% of the country’s annual economic output. Debt reached that ceiling in January, and the Treasury Department kept liabilities just within the limit by suspending investment in some federal pension funds while continuing to borrow from investors.
The Treasury warned on Friday that the space below the limit could run out as early as June 5, a few days later than its previous June 1 forecast.
Because the Treasury borrows nearly 20 cents for every dollar it spends, Washington would start missing out on payments to lenders, citizens, or both at that point.
IS THE DEBT CEILING GOOD FOR IT?
Few counties in the world have debt-ceiling laws, and Washington’s periodic lifting of the borrowing limit merely allows it to pay expenses that Congress has already approved.
Treasury Secretary Janet Yellen and other policy experts have called on Washington to lift the cap, saying it would put a bureaucratic stamp on decisions already made.
Some analysts have proposed that the Treasury could sidestep the crisis by minting a multi-trillion dollar platinum coin and depositing it in the government’s account, an idea widely seen as a bizarre gimmick. Others argue that the debt ceiling itself violates the US Constitution. But if the Biden administration were to invoke that argument, which involves the 14th Amendment, a legal challenge would ensue.
The White House has dismissed both ideas as impracticable at this stage.
WHAT HAPPENS WHEN WASHINGTON CANNOT BORROW MONEY ANYMORE?
Shockwaves would ripple through global financial markets as investors question the value of US bonds, which are considered one of the safest investments and serve as building blocks for the global financial system.
The U.S. economy would almost certainly go into recession if the government were forced to withhold payments for things like soldiers’ salaries or Social Security benefits for the elderly. Economists expect millions of Americans to lose their jobs. Rating agencies have warned that they could downgrade the credit rating of US Treasuries – as happened in an earlier showdown in 2011 – and investors have shunned some US debt securities maturing in the coming weeks as they try to prevent bills from maturing when the risk of a debt burden is the highest.
HOW DID WE GET HERE?
Republicans, who have a narrow 222-213 majority in the House of Representatives, passed a bill in late April that would raise the debt limit but also introduce sweeping spending cuts over the next decade.
The bill has no chance of passing in the Democratic-controlled US Senate. McCarthy and Biden agreed a tentative deal over the weekend to suspend the two-year loan limit and limit spending, but are facing objections from the most partisan lawmakers in each party.
HAVE WE NOT HEARED THIS SONG BEFORE?
This kind of misconduct has been part of American politics for decades, but worsened significantly after fiscal hawks in the Republican Party rose to power since 2010.
In a 2011 confrontation, House Republicans successfully used the debt ceiling to enforce tight limits on discretionary spending from Democratic President Barack Obama.
Spending caps remained in place for most of the rest of the decade, but the episode shocked investors and led to a historic downgrade in the US credit rating.
Reporting by Jason Lange; Edited by Scott Malone, Jonathan Oatis and Andrea Ricci