President Joe Biden and the leader of the House of Representatives, Republican Kevin McCarthy, yesterday cherished an agreement on the United States budget that would allow the essential increase in the debt ceiling to be approved on time and prevent the country from going into suspension of payments or default. A disagreement could cause a global recession, or, in the words of Treasury Secretary Janet Yellen, "an economic and financial catastrophe."
The borrowing limit will be exhausted, according to Yellen, by June 5. The laws of the superpower force an agreement from Congress to modify or suspend that ceiling and continue paying their bills. But the Republicans have taken the forced pact hostage for their purposes of a spending cut that threatens the Biden administration. Without the snip they demand, they refuse to vote in favor of the increase in debt.
On Thursday night, the Biden and McCarthy negotiating teams began stroking an agreement that would contemplate an increase in the debt limit by four trillion dollars; an amount sufficient to cover commitments until after the 2024 elections, as the president wishes. In exchange, Biden would accept two-year budget cuts that would affect domestic government programs. There would be a reduction in funds for the Internal Revenue Service – the US tax agency – as the Republicans want. But this would not be enough for the ultra and Trumpist sector of the conservative side, who seek to extend the reduction to the social and green economy areas.
An agreement between the negotiators would not guarantee its approval in the Chambers, given the reluctance of the ultras; especially after Donald Trump defended a few days ago allowing the default if Biden does not face "massive cuts" to stop spending "like a drunken sailor." The most progressive faction of the Democrats, for its part, refuses to touch the social games.
The debt ceiling is the amount of money the US Government can borrow to pay its bills. Such obligations include Social Security and Medicare benefits, tax refunds, military salaries, and interest payments on the outstanding national debt. The current cap is about $31.4 trillion. The country reached it in January, but then the Treasury undertook accounting adjustments that would allow it to continue paying until June. The ceiling was established in 1917, at the same time that the issuance of bonds was expedited and to avoid an abuse of the resource and an excessive imbalance of the accounts. Today it is seen as too demanding and dangerous a bondage, but difficult to get around or to remove without cost.
It is not possible to predict what would happen if the roof did not go up in time, but it would not be a good thing. Even if the default were short-term, the government would not be able to borrow more money and would therefore have to cut spending by around 25%, according to experts. The national economy would be reduced by almost 1% and the unemployment rate would increase from 3.4% to 5%, which would leave 1.5 million people without work. The nation's credit rating would go down and the US would go into recession. But if it didn't last it would be like a liquidity crisis. Instead, if the disagreement dragged on, the stock market would plunge 20% to 45%.
With no money to pay their bills, the Treasury would most likely prioritize debt payments to bondholders. That would leave other recipients of federal funds in a queue, affecting millions of households, who would not receive timely benefits such as Social Security, Medicare and Medicaid, as well as aid related to nutrition, veterans and housing. The Executive could freeze the salaries of military personnel. And, if the crisis lasted for months, unemployment would climb five points, which would mean that more than eight million Americans would lose their jobs, according to the White House.
To borrow money, the US Treasury issues securities, such as bonds, which must then be repaid with interest. Once the debt limit is reached, the treasury will be unable to issue any more securities, stopping a key flow of money to the federal government and putting an essential component of the financial system on hold. If this were to occur, "shock waves would be projected through global financial markets." Credit markets around the world would "freeze up" and stock markets "would crash," according to the White House Council of Economic Advisers. Furthermore, since investors generally view those bonds and the US dollar as safer havens, default would create a devastating loss of faith in the country and its system. Once rating agencies lowered the top US credit rating, investors would demand much higher interest rates on the bonds to offset the additional risk. Borrowing costs would then rise for consumers, as mortgage rates as well as credit card and consumer loans are tied to movements in the country's Treasury market. And companies would also pay higher interest.
National default is uncharted territory because the US leadership has never allowed it. Not consciously, at least, since in 1979 a technical failure in the accounting caused a delay in the payment of bonds. But the mistake was rectified quickly and without much blood. For the rest, the closest he got to the abyss was in 2011, when the Republicans maintained for months a blackmail similar to that of this year. Until, just 72 hours before the limit ran out, Barack Obama reached an agreement. The incident led to the downgrade of the US debt rating by Standard
Prestigious economists and jurists have encouraged Biden to invoke a provision of the Constitution, the 14th Amendment, which prohibits questioning sovereign solvency: “The validity of the public debt of the United States, authorized by law, including debts contracted for the payment of pensions and rewards to suppress insurrections or rebellions should not be questioned”, the clause states. But the president already said weeks ago that there was no time to resort to that interpretation with a guarantee of success, since a presidential order to that effect would be disputed in the courts. And there would be no time to take such a risk. The amendment could be invoked after an agreement to raise the current ceiling, the leader said.
If there is no agreement to approve the extension of the debt ceiling, some experts, including Paul Krugman, Nobel Prize winner in Economics, propose a couple of imaginative solutions. One of them, the most shocking, would consist of exploiting a peculiar legal provision of 1995 that allows the Treasury to mint platinum coins of the amount it wants; For example, one trillion dollars. Those coins would be deposited at the Federal Reserve "and the government could then withdraw cash from your account to continue paying your bills," Krugman says. The other way out would be to issue perpetual bonds, which "pay interest forever, but not principal and, therefore, have no face value." However, neither the Treasury nor the White House are clear about these options. You have to raise the roof, they insist. And Biden adds: debt default "is not on the table." But there would have to be a budget agreement. And last night it was still being negotiated. The alternative to the pact would be such a calamity that no one in Washington was betting on disagreement.
