Analysis | The Return of the Bad Movie About the US Debt Ceiling

Spread the love

Analysis | The Return of the Bad Movie on the US Debt Ceiling

The trillion-dollar waltz resumes against the backdrop of impossible negotiations over the US debt ceiling.

Did you know that the United States hit the federal debt ceiling today, a whopping $31.381 trillion? Once again, the film where the chosen ones are scared because of this ceiling begins again. The actors change, but the same bad scenario remains, at the risk of plunging the country into an unprecedented economic crisis.

In this month of January, when we receive the credit card accounts, we frown, but we try to pay the balance as soon as possible to discharge this debt. A logical decision that avoids more unfortunate consequences.

In the United States, under the leadership of Kevin McCarthy, the Republicans in Congress believe that there is no question of raising the debt ceiling again, at least without drastically cutting government spending and social programs.

He recently used the analogy of the credit card to talk about the American debt ceiling. If you give your child a credit card and they've reached the limit on authorized withdrawals, do you increase their borrowing capacity or ask them to change their way of doing things?

A fallacious analogy since, in fact, what Mr. McCarthy is advocating here is not to pay for what has already been purchased using the credit card and which has already been authorized by the parents of the child. So, if we transpose this to the debt ceiling, refusing to raise it is equivalent to not paying expenses that have already been approved.

For Kevin McCarthy's Republicans, there is no question of raising the debt ceiling if this is not accompanied by drastic spending cuts.

This false equivalence is obviously very politically selling, especially since Kevin McCarthy made promises to members of the ultra-conservative wing of the Republican Party in exchange for their votes for him to be elected Speaker of the House of Representatives.

The specter of this famous ceiling reappears all the time and each time causes a stir within the American Congress, which then becomes the terrain of a political battle on this subject.

What? x27;is the debt ceiling? This is the legal limit on the total amount of federal debt the government can accumulate.

In fact, it was in 1917, before World War I, that Congress decided to approve every US government bond issue. At the time, this limit imposed on the debt made it possible to finance the war effort without the need for a perpetual series of votes. But since then, this measure has become a bone of contention among elected politicians.

Usually, under both Republican and Democratic presidents, Congress agrees to raise this famous ceiling debt. Moreover, since the 1960s, this ceiling has been raised more than 70 times without really having to go through major crises.

Since the end of World War II, Congress and the President have changed the debt ceiling a hundred times. During the 1980s, the debt ceiling rose from less than US$1 trillion to nearly US$3 trillion. This amount then doubled during the 1990s and 2000s. Today it exceeds $31 trillion.

Joe Biden refuses to negotiate with Republicans if raising the debt ceiling is tied to major government spending cuts.

Under Barack Obama, the Budget Control Act of 2011 automatically raised the debt ceiling by US$900 billion. Since February 2013, lawmakers have suspended the debt limit, rather than raising it by a specific amount, seven times. More recently, the debt limit was increased in a December 2021 bill that officially raised the limit to its current limit of $31.381 billion.

When&# x27;they controlled both houses of Congress, from January 2021 to January 2023, elected Democrats discussed the possibility of using what is known as the budget reconciliation process to raise the debt ceiling.

However, the White House gave up hope because the odds of getting Republican votes and disposing of the 50 Democratic votes in the Senate were near nil for a reconciliation pass.

The United States is borrowing colossal sums of money by selling Treasury bonds to investors around the world and using those funds to… pay off existing financial obligations. That includes military salaries, social safety net benefits, and…interest on the national debt.

Unless elected officials in Congress agree to the raise, then extraordinary measures must be taken, that is to say, find ways of circumventing the problem in an accounting way. What Janet Yellen, the US Treasury Secretary, is proposing is to prioritize the payment of certain financial obligations and drop others.

Treasury Secretary Janet Yellen is going to have to take extraordinary measures to get around the lack of a debt ceiling hike.

In this case, the government will first temporarily suspend payments to federal employees' retirement, disability and health funds and then temporarily stop reinvesting maturing government bonds in government accounts. retirement savings for civil servants. All this should make it possible to continue to finance government activities until next June.

You should know that the Secretaries to the Treasury of all administrations have used these extraordinary measures at least 16 times since 1985.

If the circumvention measures have all been exhausted and if elected members of Congress have not agreed to raise the debt ceiling, then the country will be in default.

This could translate into colossal job losses, a global impact recession, and higher interest rates that would further complicate the management of…the federal debt.

Congress is once again the scene of the debt ceiling drama, which now exceeds $31 trillion.

Furthermore, an actual default by the US could mean that investors end up losing confidence in future payments on US debt.

Is payment default possible? Yes, but the United States has never intentionally defaulted on its obligations due to the debt ceiling.

Denmark is the only other country to have of a debt ceiling, in the 1990s, as a constitutional override to allow day-to-day responsibilities for the national debt to be transferred from the Ministry of Finance to Denmark's independent central bank.

However, this ceiling has been set so high that it should probably (in principle) never be reached. Enshrining this ceiling in a law therefore had no political impact since Danish politicians created a threshold that was too high to give rise to constant debate.

In context currently, Republicans are asking for potential spending cuts in exchange for raising the debt limit. White House response: It's a hostage hold of the US economy, so out of the question.

Joe Biden indeed refuses to tie spending cuts to the raising of this famous ceiling. Result: the stalemate will continue.

In the meantime, the scenario of fear and threat continues to parade on the political scene, according to blackmail behind the scenes and theatrical twists in front an audience of spectators (the Americans) who have the most to lose in this political drama.

Previous Article
Next Article