Explained | What is the stalemate over the U.S. debt ceiling and what happens if the government defaults?

The story so far: United States Treasury Secretary Janet Yellen notified Congress last week that the country could default on its debt as early as June 1, if the Republican-dominated House of Representatives and President Joe Biden’s White House did not reach a consensus to raise or suspend the debt ceiling. A default on its debt, something that has never happened before, could send shockwaves in global financial markets, increase borrowing costs for the U.S. and impact the dollar’s reputation as a reserve currency.

What is the U.S. debt ceiling?

When the federal government spends more than it brings in, in terms of taxes and other revenue, it runs up a budget deficit. Since 2001, this deficit has averaged $1 trillion annually. It then has to borrow money to meet its financial obligations, accruing debt. The government borrows tby creating and selling debt securities like bonds to U.S. investors and companies, banks, pension funds, foreign investors and countries. The largest part of these are owned by the U.S. federal government itself, which keeps the money for social security schemes, medicare, federal pensions and so on.

While the administration and Congress decide on taxation and spending, the collection of taxes and the borrowing of funds is done by U.S. Treasury Department. In 1917, Congress passed the Second Liberty Bond Act, to allow then-President Woodrow Wilson to take out funds for the First World War without waiting for the approvals of absent Congress lawmakers. However, curtailing the President’s spending capacity,the Congress created a limit on borrowing ($11.5 billion at the time), thus creating a debt ceiling that could only be raised by approval of the Congress (House and Senate).

The debt ceiling started to take its present-day form in 1939, when separate borrowing caps for bonds were consolidated into one debt ceiling, then set at $45 billion. The U.S. government has hit or come close to hitting the debt ceiling multiple times.According to Treasury Department figures, Congress has acted 78 separate times since 1960 either to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic Presidents. The last such change was in 2021.

While the government continues to receive taxation revenue after hitting the debt ceiling, it cannot borrow any more to pay its existing bills. The U.S. hit its current debt limit of $31.4 trillion on January 19 this year, but the Treasury activated the “extraordinary measures” mechanism to allow the government to meetits obligations. These extraordinary measures are accounting adjustments within several government accounts that temporarily reduce the amount of U.S. Treasury securities issued to them. These actions include suspending new investments or redeeming existing investments early.

However, if the debt ceiling is not raised once the government exhausts extraordinary measures and runs out of cash, the U.S. would be unable to pay its debt-holders, resulting in a default.

Why have debt ceiling standoffs become a recurring issue?

For starters, the debt ceiling is not a “forward-looking” budgeting instrument, i.e. it does not reveal what potentially ideal levels of spending look like. First, Congress approves programmes for which it does not have the entire funding, and then there’s a limit on how much the Treasury can borrow to pay for these already approved programmes. Which is why economists have called it a “strange” instrument. Take this analogy, for instance: first Congress approves $100 of spending, $70 comes in from taxes but the cap on what the government can borrow to pay for the rest is fixed at a mere $15.

Only one other country apart from the U.S. has a set ceiling on borrowing— Denmark. However, Denmark’s debt ceiling is set several times higher than the country spends; in 2021, the debt of Denmark’s central government was just 14% of its ceiling, notes the Council on Foreign Relations (CFR).

Another reason why disagreements overthe debt limit happen often, almost annually since 2011, is that it has become a political bargaining chip, as any raise or suspension has to be approved by Congress. As American politics becomes increasingly polarised, the Opposition has often used the debt limit as a way of getting budgetary and other legislative concessions. Sometimes, debt rate hikes have also been tied to the passing of certain bipartisan legislations. Reuters points out that Congress has often imposed conditions on these debt-ceiling hikes, or paired them with other tax and spending activity.

In 1957, Congress delayed a debt-ceiling hike to pressure the Pentagon to operate more efficiently, and in the early 70s, linked increases to expanded Social Security benefits. In 2018 and 2019, debt-ceiling was tied with broader bipartisan spending packages. However, debt ceiling decisions have not always been smooth, with the U.S. coming dangerously close to defaulting on its debt in 2011 when the Republicans and the Barack Obama administration could not reach an agreement t till the last minute. This was the first and the last time that rating firm S&P downgraded America’s prized ‘AAA’ credit ratings. The political gridlock led to a government shutdown, sent financial markets reeling, and caused a huge stock sell-off.

Observers have called the current impasse between House Republicans and the Biden administration even messier than in 2011. The Republican Speaker Kevin McCarthy-led House passed a Bill that pairs a $4.8 trillion in spending cuts with an increase in the debt ceiling of $31.4 trillion. However, Mr. Biden said that he wants a clean debt-ceiling height and won’t negotiate any kind of spending cuts, resulting in the current deadlock.

Treasury Secretary Ms. Yellen and other economists suggest doing away with the debt ceiling, which once served a purpose but does not contribute to fiscal discipline anymore and leads to frequent political grandstanding, often at the risk of national and global financial stability.

What will happen if the U.S. defaults?

Analysts say there is no set post-default scenario since the U.S. has never actually defaulted on its debt before. They have warned, however, of a “catastrophic” situation for American and global financial markets. The New York Times notes that after the extraordinary measures get exhausted and cash with the treasury runs out, the government would be unable to pay its bills including military salaries, benefits to retirees, and interest and other payments it owes to bondholders. If the government cannot make interest payments to domestic and foreign investors who own its debt securities, it could plunge the globe into a financial crisis, say Wall Street experts.

The CFR points out that the “unthinkable” event of a U.S. default could lead to another downgrade of U.S. creditworthiness by agencies, large-scale job losses, weakening of the dollar, stock sell-offs, and a rise in the cost of borrowing for the U.S. government. It would also increase the national debt, in turn causing widespread interest rate hikes for business owners, mortgages, and other sectors. A drop in U.S. consumer confidence would translate to shocks in the financial market, tipping the economy into recession.

The creditworthiness or the confidence in the repayment ability of U.S. treasury securities has long strengthened demand for U.S. dollars and made it the world’s reserve currency, with more than half of the world’s foreign currency reserves held in U.S. dollars. A loss of confidence in the U.S. economy, resulting from default or even the uncertainty around it, could force investors to sell U.S. Treasury bonds, thus weakening the dollar. A sudden decrease in the currency’s value could domino across treasury markets as the value of these reserves drops.

What are the Republicans demanding in their package in exchange for a debt ceiling hike?

The legislation passed by the Republican-led U.S. House of Representatives would suspend the U.S. debt limit till March 31, 2024, or until it increases by another $1.5 trillion, whichever comes first. The Bill would cut a wide range of government spending back to last year’s levels, amounting to a decrease of $4.8 trillion or about 9%. As per the nonpartisan Congressional Budget Office, the plan could save roughly $3.2 trillion over the coming years and reduce the U.S. government’s borrowing costs by $547 billion over a period of 10 years. However, Mr. Biden is not willing to negotiate spending cuts affecting his plans to cancel student debt, or those reducing healthcare for the poor, tax revenue, or green initiatives, among other things.

While it is not certain how this would impact government operations, the Department of Transportation said that it would shut down 375 air-traffic control towers (affecting jobs) and the Department of Agriculture indicated that it could make it tougher for almost a million Americans to access federal food aid.

The legislation plans to cancel healthcare, infrastructure, rental aid and other funds remaining unspent from the $5.2 trillion approved by Congress in the last three years for COVID-19 relief. It would reverse President Biden’s effort to cancel up to $10,000 of student debt for some borrowers and hamper another plan to peg debt repayment to borrower income levels. It also aims to reverse legislation increasing the budget for the Internal Revenue Service, which was to be used for hiring more employees and technological advancements to augment tax revenue.

The Republican Bill would also tighten work requirements for participants in some government poverty alleviation programmes. For example, adults up to age 56 not having children receive health insurance through the Medicaid program covering low-income individuals. They would have to work at least 80 hours a month to take part in job training or community service.

While Mr. Biden has not met with Republican leaders including Mr. McCarthy since February, with the Treasury Secretary’s June 1 warning, the White House has called a meeting with top Congress leaders of both parties on May 9, to discuss the debt-ceiling issue.

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Joe Manchin: ‘The Most Popular Republican In The Senate’

Fresh from his high five-ing trip with Sen. Kyrsten Sinema to meet with their real constituents in Davos, Sen. Joe Manchin returned to the Sunday shows to assure all of us that HE is the one who will ruin the Democratic Party’s attempts to make a better tomorrow. So let’s check out Joe Manchin and his amazing terrible friends.

Let’s Negotiate With Economic Terrorists

Appearing on CNN’s “State Of The Union,” Manchin is asked about the White House request for a clean debt ceiling bill. Manchin, ever the helpful stooge, took the “we won’t negotiate with Republicans on the debt ceiling” out of context to talk about a need to negotiate in governing. This accidental or willful misunderstanding did not go unnoticed by the side of the aisle all too willing to remove context so they can extort cuts to programs that help people.


But just in case we thought Manchin is only misguided and truly is a part of the solution, the senator from West Virginia quickly disabused us of that notion. When Dana Bash asked if he would support Democratic Rep. Ruben Gallego’s Senate run in Arizona, Manchin made it clear that he would instead support his Senate partner-in-obstruction.

MANCHIN: […] I have been voting for 40 years fairly conservative all the way through, and I think people know I’m in the middle and a centrist. […] I would think that she needs to be supported again, yes, because she brings that independent spirit. […]

Two things:

1) If you have been doing something for 40 years (or as a senator for 12 years) and nothing has drastically improved in your state, you have failed miserably.

2) Contrarianism, in and of itself, is not independence. It’s as dangerous a thing as mistaking speaking without thought, for speaking the truth. Don’t you think?

Speaking of…

Here Comes the “Both Sides” Express!!

Manchin then moved over to NBC’s “Meet The Press” where he proceeded to say stupid things with zero pushback from host Chuck Todd. When commenting on the investigation regarding how Joe Biden handled classifed documents, Manchin expressed what he presumably considered profound insight instead of a lazy false equivalence.

MANCHIN: It’s just hard to believe that in the United States of America we have a former president and current president basically in the same situation.

No, Manchin, they are not in the same situation as it’s been made clear numerous times already.

Manchin is in such a bubble, he made the following statement without seemingly realizing how deluded it is.

Hahahahahahaha! Jesus, Manchin would get crushed in a Democratic (or Republican) primary well before a general election.

Even Rep. Nancy Mace of South Carolina, in the effort to compliment Manchin, basically narrows down why he’s never gonna be President. (Roll Credits)

Mace, herself also tried to “both sides” the classified documents drama, but her effort was so asinine it momentarily woke up the journalist trapped in Chuck Todd’s sunken place.

MACE: Well, I think that’s because there’s no – there’s very little information about Biden. I mean, these documents were hidden for five years. We have very little information, whereas with the former president, everybody knows that those documents existed. They knew where they were. They knew where they were located. […] There was information that was presented to the public about —

TODD: Let me stop you there. We didn’t know where they were located.

MACE: – the number of documents, for example.

TODD: They defied a subpoena, it took a search warrant.

MACE: Well, the FBI and the DOJ —

TODD: In fairness, they didn’t know.

Mace also tried to downplay the possibility of a government shutdown and an economic default if the debt ceiling isn’t raised.

MACE: […] But, you know, this happened under the previous administration. The government was shut down for 35 days. There was a stalemate. But people still got paid. Accounts still got filled up. And the sky didn’t fall. […]

Nothing too bad happened except a threatened downgrade on our credit and an increase in the debt. Totally great, Mace.

On CBS’s “Face The Nation,” Republican Rep. Mike Turner from Ohio tried to “both sides” an insurrection when asked why Republicans seated 19 election deniers on the Oversight Committee.

Remind us again, when was the Democratic insurrection? We must have memory-holed and lost all the footage of liberals marching through the Capitol with coexist flags and screaming in the Senate chambers in Kitara Ravache garb to make John Kerry president.

On ABC’s “This Week,” Republican Rep. Michael McCaul from Texas also tried to assure us like a common Susan Collins that Rep. Marjorie Taylor Greene had learned her lesson and would grow into her office.

Who among us has not radically matured from a childlike 44-year-old to a fully grown 49-year-old adult?

But … But … Chicago!

Appearing on CNN’s “State Of The Union,” McCaul tried to downplay the need for gun reforms in the wake of another mass shooting by once again invoking Chicago gun violence. Thankfully, Bash pointed out the patchwork of gun laws in the US and that most of the guns in Chicago come from neighboring states with lax gun laws like Mike Pence’s Indiana.

Some dog whistles will never die.

Have a week.



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