The countdown to a possible U.S. government bankruptcy is looming, and friction between President Joe Biden and House Republicans is raising concerns about whether the United States can weather a potential economic crisis.
The Treasury Department said Thursday in a letter to congressional leaders that it had begun taking “extraordinary measures” as the government reduced its legal borrowing capacity of $38.381 trillion. An artificially imposed ceiling, the debt ceiling has been increased approximately 80 times since the 1960s.
Markets remain calm for now given that the government can temporarily rely on accounting adjustments to stay open and any threats to the economy will be months away. Even many anxious analysts are suggesting that a deal will happen.
But this particular moment appears more tense than previous clashes over the debt limit because of wide differences between Biden and incoming House Speaker Kevin McCarthy, who presides over a fractious Republican caucus.
These differences increase the risk that the government will default on its obligations for political reasons. That could rattle financial markets and plunge the world’s largest economy into a completely preventable recession.
Biden and McCarthy, a Republican from California, have several months to reach an agreement as the Treasury Department imposes “emergency measures” to keep the government operating at least until June. But years of intensifying partisan animosity have produced a conflicting set of demands that threaten lawmakers’ ability to work together on a basic duty.
Biden is pushing for a “clean” increase in the debt limit so that existing financial commitments can be maintained and has refused to even begin talks with Republicans. McCarthy is calling for negotiations that he says will lead to spending cuts. It is unclear how much he wants to cut and whether his fellow Republicans would support any deal after a testy start to the new Congress that required 15 rounds of voting to elect McCarthy as speaker.
Asked twice on Wednesday whether there was evidence that House Republicans could ensure the government would prevent bankruptcy, White House press secretary Karin Jean-Pierre said it was their “constitutional responsibility” to protect the full faith and trust of the United States states. She did not say whether the White House sees signs at this point that bankruptcy is out of the question.
“We’re just not going to negotiate that,” Jean-Pierre said. “They have to feel the responsibility.
McCarthy said Biden needs to recognize the political realities that come with divided government. The spokesman likened the debt ceiling to a credit card limit and called for a level of fiscal restraint that did not occur under President Donald Trump, a Republican who in 2019 signed a bipartisan suspension of the debt ceiling.
“Why create a crisis over this?” McCarthy said this week. “I mean, we have a Republican House, a Democratic Senate. We have the president there. I think it’s arrogant to say, ‘Oh, we’re not going to negotiate on almost anything,’ and especially when it comes to funding.”
House Republican Leader Kevin McCarthy, left, and Senate Majority Leader Chuck Schumer prepare for a battle over the debt ceiling. (Kevin Lamarck/Reuters)
Any deal must go through the Democrat-controlled Senate. Many Democratic lawmakers are skeptical about the ability to work with Republicans associated with the Make America Great Again movement launched by Trump. The MAGA movement claims the 2020 election lost by Trump was rigged, a lie that contributed to the January 6, 2021 riot at the US Capitol.
“There should be no political fraud on the debt limit,” Senate Majority Leader Chuck Schumer said. “It is reckless for Chairman McCarthy and the MAGA Republicans to attempt to use the full faith and credit of the United States as a political bargaining chip.”
“Extraordinary measures” are underway.
To keep the government open, the Treasury Department on Thursday took a series of accounting maneuvers that will hold back contributions and buybacks to state workers’ pension and health care funds, giving the government enough financial room to handle day-to-day spending until approximately June.
What will happen if these measures are exhausted without a debt limit deal is not known. Prolonged defaults could be devastating, with markets collapsing and panic-induced layoffs if confidence in a cornerstone of the global economy evaporates, the US Treasury notes.
Analysts at Bank of America warned in a report last week that “there is a high degree of uncertainty about the speed and extent of the damage the US economy will sustain.”
The main challenge is that the government will have to balance its books on a daily basis if it is unable to issue debt. If the government can’t issue debt, it would have to impose cuts equal to an annual rate of up to 5 percent of the entire U.S. economy. Analysts say their main case is that the US avoids bankruptcy.
Still, if past debt ceiling showdowns like the one that occurred in 2011 are any guide, Washington may be in a nervous state of suspended animation with little progress until “date X,” the deadline when The Treasury’s “emergency measures” have been exhausted.
Unlike the 2011 crash, the Federal Reserve has been actively raising interest rates to reduce inflation and reduce its own US debt, meaning recession fears are already heightened among consumers, businesses and investors.
Biden administration officials have said they will not prioritize payments to bondholders if the country passes the “X date” without a deal. Over the years, officials have explored this emergency option, which Treasury officials across the administration have said is unfeasible because of the government’s payment system.
“To some extent, the ’emergency measures’ are the backup plan, and once they are exhausted, the next step is a big question mark,” Wells Fargo economists wrote in a Thursday analysis.
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