Yesterday, Thursday, the United States reached the borrowing limit of $ 31.4 trillion, amid fears that the continuation of disputes within Congress may hinder reaching an agreement on raising the debt ceiling and thus entering into a financial crisis and disrupting the largest economy in the world.
US Treasury Secretary Janet Yellen told congressional leaders, including House Speaker Kevin McCarthy, that her department had begun using extraordinary cash management measures that could lead to avoiding default through June 5.
A heated confrontation is taking place over raising the ceiling in the House of Representatives between the Republicans who control it and the Democrats to whom President Joe Biden belongs.
And the White House announced that Biden will not negotiate with hard-line Republicans over their opposition to raising the debt ceiling in the United States.
Republicans are demanding that Biden agree to cut government spending, arguing that the time has come to drastically reduce the borrowing that Congress authorizes to increase each year.
On the other hand, the White House requires that any spending cuts demanded by Republicans not affect social security programs and military spending, and that it avoid imposing new taxes.
What is the debt ceiling?
The debt ceiling, set by Congress more than 100 years ago, is the maximum amount the government can borrow, which currently stands at $31.4 trillion.
Simply put, the US government, like the rest of the world, borrows when it spends more money than it earns, by issuing Treasury bonds.
The ceiling represents the maximum that the state cannot exceed in borrowing, and therefore it must rely on its cash flow to meet its payments, from military salaries to letters of credit.
The US government annually issues treasury bonds in dollars for borrowing, by putting them on the market at a certain interest rate.
These bonds can be purchased by foreign countries, individuals, corporations, and local agencies and institutions within the United States.
Why was borrowing limited?
Prior to 1917, Congress authorized the government to borrow a fixed amount of money for a specified period, and when the loan was paid off, the government could not borrow again unless authorized to do so.
This changed after a new law was passed in 1917 that set a debt ceiling and allowed the continual extension of borrowing without congressional approval.
Congress enacted the measure to allow then-President Woodrow Wilson to spend the money he deemed necessary to fight World War I without waiting for legislators who were often absent, or unable to attend sessions due to long distances between states and the difficulty of arriving in time.
However, Congress did not want to write a blank check to the president, so it limited the borrowing to $11.5 billion, and stipulated that there be new legislation in the event that the amount was desired to increase.
Since then, the debt ceiling has been raised dozens of times, and has been suspended on several occasions, most recently in August 2019, when Congress suspended the limit until July 31, 2021.
Consequences of default
A default by the world’s largest economy, which is a precedent, would have dire consequences with repercussions for the entire global economy.
Internally, failure to raise the debt ceiling will lead to the possibility of not paying the salaries of government employees or contractors contracting with it, as well as it may stop granting loans granted to small companies or university students, and stop paying the bills owed by it, and this technically means that it is in a state of default.
A default is also expected to plunge the United States into recession, resulting in a drop in GDP of about 4 percent.
It will also lead to Americans losing millions of jobs, causing a rise in the unemployment rate.
Externally, this backwardness will have dire economic consequences, as it will lead to higher interest rates, lowering the value of the dollar against other global currencies, and causing global markets to panic and possibly stagnate.
And the recession will push American consumers and companies to reduce the amount of goods and services they buy from abroad, which means that emerging market countries that depend on exports to the United States for a large part of their income will be the most affected.
Also, the expected depreciation of the dollar will have a similar effect, as it will make the purchase of supplies from abroad more expensive for American companies, and thus cause a decrease in the volume of trade exchanges worldwide.
The depreciation of the US currency will affect countries whose economies are pegged to the dollar, which will see a reduction in the purchasing power of their current stock of currency.
“extraordinary measures”
On Thursday, the US Treasury began taking measures to avoid defaulting on government debt.
These “extraordinary measures” could help reduce outstanding debt subject to the current cap of $31.4 trillion, but the Treasury warned that the tools available would only help for a limited period, likely not to exceed six months.
In a letter Thursday, Treasury Secretary Janet Yellen urged Congress “to act quickly to protect the reputation and credibility of the United States.”
She said last week that “failure to complete government duties could cause irreparable damage to the US economy, the lives of all Americans, and global financial stability.”
“the edge of the abyss”
Experts believe that in light of the current “political bipartisanship” between the two parties over the debt ceiling, the US government will reach the financial “brink” before consensus is reached.
“This is not the first time things have reached this point,” says Hassan Mneimneh, a professor at the Middle East Institute.
Mneimneh added, in an interview with Al-Hurra, that “this method is used by both parties, because each has its own priorities, but in the end it is not in anyone’s interest not to reach consensus.”
Mneimneh believes that “this agreement may be temporary, temporary, or with a specific time limit, but in the end there will be a solution.”
Mneimneh states, “No one wants to forfeit the credit value of the United States. We will certainly witness a lot of bidding, disputes, and demands.”
Although he ruled out the hypothesis of a US default, Mneimneh indicated that the occurrence of this “would lead to the loss of the US position in the credit value and lead to imbalance and turmoil on a global level.”
In turn, Professor at the University of Berkeley in California, Robert Rich, warned in a tweet on his Twitter account that “failure to raise the debt ceiling may lead to a global financial crisis.”
“Let’s be clear, there should be no negotiation on the debt ceiling,” said Rich, who served as Secretary of Labor under US President Bill Clinton.
The United States nearly defaulted in 2011 when brinkmanship between House Republicans and then-President Obama led to a market sell-off and the first downgrade of the United States’ credit rating.
The United States witnessed a protracted battle at the time over the debt ceiling, which forced it for years to reduce domestic and military spending.
Jamie Dimon, CEO of JPMorgan Chase Bank, warned Thursday that default would harm the credibility of the United States, adding, “We must not question the creditworthiness of the United States government.”
“This is sacred. It should never happen,” he said in an interview with CNBC.
