A potential showdown between President Joe Biden’s Democrats and a newly formed Republican majority in the U.S. House of Representatives over the debt ceiling is threatening to steer Washington to the verge of a debt crisis.
What’s The Debt Ceiling?
Washington regularly puts a limit on federal borrowing. Currently, the ceiling is set at $31.4 trillion, equivalent to around 120% of the country’s annual economic output.
After last week, the government could get so near to the debt ceiling that the Treasury Department might have to halt investments in some federal pension funds to continue borrowing, according to experts at the Bipartisan Policy Center.
By mid-2023, Washington could have to stop entirely altogether and depend solely on tax receipts to foot its bills. Because Treasury borrows roughly 20 cents for every dollar it spends, Washington at that point would start falling behind payments owed to lenders, citizens, or both.
Is The Debt Ceiling Good For Anything?
Few countries around the globe have debt ceiling laws and Washington’s periodic raising of the borrowing limit only allows it to pay for spending Congress has already approved.
Treasury Secretary Janet Yellen and other policy experts have asked Washington to abolish the limit, because it amounts to a bureaucratic stamp on decisions already agreed upon.
Some analysts have suggested that the Treasury can avoid the crisis by minting a multitrillion-dollar platinum coin and putting it in the government’s account, an idea broadly viewed as an outlandish gimmick. Others hold that the debt ceiling itself goes against the U.S. Constitution. But if the Biden administration raised that argument, a legal challenge would follow.
The debt ceiling is backed by Democratic and Republican lawmakers alike and both have used it as leverage when their party doesn’t command the White House. That makes it unlikely to be abolished anytime soon.
What Happens When Washington Can No Longer Borrow Money?
Shockwaves would ripple through global financial markets as investors call into question the value of U.S. bonds, which are seen as one of the safest investments and act as building blocks for the world’s financial system.
The U.S. economy would almost certainly tip into recession if the government was forced to fall behind on payments on things like soldiers’ salaries or Social Security benefits for the elderly. Economists predict that millions of Americans would become jobless. Investors are already concerned and are asking for higher yields for some U.S. debt securities that come due around the expected showdown.
Buy Crypto NowHow Did We Get Here?
Republicans won control of the House in the November elections, increasing their ability to delay legislation like debt-ceiling increases.
House Speaker Kevin McCarty has said spending cuts will have to be part of any debt-ceiling increase. Biden’s White House has promised that a Republican “hostage-taking” strategy won’t bear fruit.
Haven’t We Heard This Song Before?
This sort of brinkmanship has been part of U.S. politics for decades but worsened greatly after fiscal hawks in the Republican Party rose to power since 2010.
In a 2011 showdown, House Republicans effectively used the debt ceiling to eliminate sharp limits on discretionary spending from Democratic President Barack Obama.
Spending caps remained in place for most of the rest of the decade, but the episode unnerved investors.
