Washington: How will the debt crisis end?
Many scenarios are overtly and covertly manipulated, but no one knows for sure. Possibilities range from cumbia to economic chaos with so many possibilities in between.
So far, neither President Joe Biden nor Speaker of the House Kevin McCarthy, R-Calif., gives way before talks scheduled for Tuesday. Biden wants to increase the government’s $31.4 trillion statutory borrowing limit, so the federal government can keep paying its bills and the risk of a historic default goes away. McCarthy and other Republican lawmakers want a deal that guarantees trillions of dollars in spending cuts before they sign up to raise the debt limit.
Time is short: the Treasury Department warns that the US could default as soon as June 1 if there is no deal.
Look at the possible outcomes:
Let’s agree to disagree
The president wants to disarm the whole controversy by having Republicans publicly pledge that the United States will not default. He will then be on hand to discuss spending, taxes, and other budget issues.
He wants assurance from McCarthy that the US can continue to pay all its bills by having the ability to continue borrowing. The president says he’s willing to have a public debate with Republican lawmakers about the budget, not with the world’s largest economy being “hostage.”
“As I’ve said all along, we can discuss where to cut, how much to spend, and how to finally move to a tax system where everyone starts paying their fair share,” Biden said. “But not under threat of default.”
It’s unclear how many Republican lawmakers share his definition of default. Some suggest default would apply only to unpaid debts, while the administration wants to include salaries for federal workers, reimbursement to contractors, aid to the poor, veterans, schools and more.
McCarthy said shortly before the House passed a bill including $4.5 trillion in party-style deficit savings that the United States would not default. But he still links the issue directly to spending cuts in a way that Biden wants to avoid.
“Tackling debt requires us to pull together, find common ground, and cut spending,” McCarthy said last month. “Let me be clear: Defaulting on our debt is not an option, but neither is the future of higher taxes.”
Republicans are holding on tight
Congressional Republicans can hold out and force the Democrats to sway.
McCarthy has a narrow majority in the House of Representatives: 222 Republicans, compared to 213 Democrats.
His debt limit bill would reverse discretionary spending to 2022 levels, then put a 1% cap on future increases. The bill would also reflect Biden’s student loan debt relief, his increased funding for the IRS and tax incentives created in 2022 to encourage the adoption of clean energy. These cuts would extend the debt limit through March 31, 2024, or up to an additional $1.5 trillion.
GOP conservatives like South Carolina Rep. Ralph Norman and others say they won’t support anything less than the bill, which Republicans passed in the House on April 27 by 217 votes.
But Senate Majority Leader Chuck Schumer, DNY, won’t let the bill pass through the Senate. So is Biden. The question as the deadline approaches is whether the Republicans will stay united and that causes the Democrats to give up. There is also a risk that disagreement within the Republican caucus could endanger a McCarthy speaker, which could make it more difficult to reach an agreement.
The question is what kind of agreement can get through the House of Representatives, the Senate and the Oval Office.
Get an extension
Washington likes to put things off—the old “kicking the can on the road” routine.
There is a possibility that lawmakers could agree to a short-term extension, pushing the expiration of the debt limit to Sept. 30, when the federal budget also needs to be passed.
This is in line with the GOP’s effort to synchronize the budget debate with the debt limit, while removing the immediate risk of default. It is the option that government officials generally discuss privately and with the most optimism.
However, House Minority Leader Hakeem Jefferies tried to pour cold water on the idea in an interview Sunday with NBC News.
“I don’t think the responsible thing to do is kick the can down the road,” Jeffries said, even as he prioritized the importance of avoiding default.
The markets are going crazy
Wall Street could save the day, sort of, by crashing.
Along with economists, Senate Budget Committee Chairman Sheldon Whitehouse, the direct shorthand, has indicated that an aggressive market sell-off could force Republicans to back down. Their donors have been screaming about pending financial losses and giving every lawmaker an incentive to be a hero and save the jobs and retirement savings of millions of Americans.
Joe Brosolas, chief economist at advisory firm RSM US, said in an email Monday that talk of a possible default actually makes it more expensive for investors to buy insurance for US Treasury securities. But the panic has been largely contained, so far, by the broader stock market that many voters and lawmakers follow.
Fourteenth Amendment
Biden could play the constitution card.
The Fourteenth Amendment became part of the Constitution after the Civil War. It states, “The validity of the public debt of the United States, permitted by law, … shall not be questioned.”
Lawrence Tribe, professor emeritus at Harvard Law School, wrote Sunday in The New York Times that Biden could argue that he has a constitutional duty to avoid default and so can go over the debt limit to continue spending already approved by Congress. On Monday, a union of government employees sued Treasury Secretary Janet Yellen and Biden to make the case that they are constitutionally obligated to ignore the debt limit.
As a former senator, Biden loves deferring to Congress. But when pressed about invoking the Fourteenth Amendment this past week, he kept his options open.
“I’m not there yet,” he told MSNBC.
Sen. James Lankford, R-Oklahoma, said Biden cannot act unilaterally. He told ABC News that the Constitution is “very clear that spending — all those details of spending and money have to come through Congress.”
Mint a coin
This is among the many creative – and unexpected – solutions circulating on the Internet. The idea is that the government could mint a trillion-dollar platinum coin and use it to avoid default. Basically, there is a loophole in the law that could allow the United States to mint a coin of any denomination if it is made of platinum.
This has at least one big problem: Yellen dismissed the idea in a January interview with The Wall Street Journal, calling it “something that’s a gimmick.”
This is the most terrifying possibility.
If there is no agreement, the US government can reach its “X deadline” – the moment when it can no longer pay all of its bills. The Treasury will no longer be able to use accountability strategies to keep the government open. If the government can no longer borrow, unpaid bills will mount and the government will default.
But, but… not all default settings are the same.
The United States could miss some payments for a short period, and the risk of things getting worse could prompt lawmakers to strike a deal. But even a “brief” default would cost the economy 500,000 jobs, according to a White House analysis. A “protracted” default would cost 8.3 million jobs, according to the analysis, nearly as many job losses as it did during the 2008 financial crisis.


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