The Deadlocked Meeting Between Kevin McCarthy and Joe Biden: Implications for the US Debt Ceiling and the Global Economy

UNITED STATES – Are we heading towards a global economic crisis? With only ten days left to reach an agreement on the US debt ceiling, a meeting between House Republican leader Kevin McCarthy and President Joe Biden again ended in deadlock on Monday, May 22. .

“We don’t have an agreement yet”said Kevin McCarthy leaving the White House, “but I found that our discussion had been productive, more than the previous ones that we had”, he added. Same story on the side of Joe Biden, who also called the meeting a « productive ». However, he acknowledged that “disputes” persisted.

Officially, the ceiling was reached on January 19. The government has obtained a reprieve thanks to exceptional measures, but the risk of a default is inexorably closer if the debt ceiling is not raised. From June 1, the State may be unable to take on more debt to pay its expenses if a solution is not found.

What is the debt ceiling? Why are there blockages and what would be the consequences of non-payment ? Le HuffPost make the point.

• What is the US debt ceiling?

The mechanism was created in 1917, when the United States entered the First World War. At the time, the US Treasury (equivalent to the Ministry of the Economy) had to go through Congress each time to issue debt, that is to say, borrow money to finance the country’s expenses. With the war and its astronomical costs, this situation has become untenable.

The debt ceiling was created so that the government could incur debt first to finance the war, and then pay civil servants’ salaries, pay social benefits, or repay its creditors, but only up to a certain amount. .

• Why does it get stuck?

It is possible to raise this ceiling with the agreement of the Congress. Since 1960, it has even been raised 78 times, most recently in 2021 to $31.4 trillion. But raising the maximum debt ceiling, often a routine procedure, can sometimes be the subject of a political battle.

This is the case this year, with the House of Representatives with a Republican majority. If the White House insists that raising the debt ceiling must be voted on without conditions or negotiations, the opposition refuses to vote on it as long as Joe Biden does not accept significant budget cuts.

• What will happen if the blockage persists?

As early as January, Secretary of State for the Treasury Janet Yellen warned: “A default would cause irreparable damage to the US economy, the daily lives of all Americans, and the overall financial situation. » More recently, she insisted: “We will enter a recession and it will be catastrophic. » However, it is difficult to say precisely what could happen because such a situation would be unprecedented.

The experts questioned in the American media fear an impact on the rating of the American public debt given by financial rating companies or even the drop in household confidence, as was the case in 2011. Under the Obama presidency, an arm of iron similar to that of today had in fact almost ended in default. An agreement had been reached two days before the deadline, but the uncertainty had already had consequences.

According to the think tank Council on Foreign Relations (CFR), economists from Golmans Sachs have calculated that a tenth of the economy would be shut down in the event of default. The think tank Third Way fears for its part a rise in interest rates and estimates that three million jobs would be in danger.

• And at the international level?

“There would be very serious repercussions not only for the United States but also for the world economy in the event of a default on the American debt”IMF communications director Julie Kozack warned in mid-May, days after a similar warning from Janet Yellen.

For what ? The CFR explains that the solvency capacity of the United States has boosted the demands of the dollar, contributed to its value on the market and its place as the world’s leading reserve currency. Therefore, any blow to the US economy can cause investors to sell their Treasury bills or bonds, weakening not only the dollar but the entire global economy that relies on that currency.

• Are there alternative solutions?

If an agreement is not reached quickly, Congress can suspend the debt ceiling. This solution is only temporary and means that new negotiations will have to take place again later, but it has been used seven times since 2013.

More radical, economists are proposing to remove the debt ceiling. “ I think it is very destructive to put the President and myself, as Secretary of the Treasury, in a position where we are unable to pay the bills that are the consequences of past decisions”had notably estimated Janet Yellen in 2021, praising this option.

For his part, Joe Biden recently raised the idea of ​​using the 14th amendment to the Constitution which stipulates that “the validity of the United States public debt, authorized by law, must not be questioned”. Translation: Bypassing Congress and continuing to issue bonds. This controversial political tool could, on the other hand, plunge the United States into another crisis, this time constitutional.

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