The tussle between US President Joe Biden and the newly elected Republican majority in the US House of Representatives could threaten to push the country to the brink of a debt crisis
An expected showdown between President Joe Biden's Democrats and the newly formed Republican majority in the US House of Representatives over the debt ceiling is threatening to push Washington to the brink of a debt crisis.
What is the loan limit?
Washington regularly sets limits on federal borrowing. Currently, the cap is set at $31.4 trillion, which is equivalent to about 120% of the country's annual economic output.
As soon as this week, the government could get so close to the debt limit that the Treasury Department may have to suspend investments in some federal pension funds in order to borrow, according to experts at the Bipartisan Policy Center.
By mid-year, Washington may have to stop borrowing altogether and rely solely on tax receipts to pay its bills. Because the Treasury borrows about 20 cents for every dollar it spends, Washington will at that point begin missing out on outstanding payments to lenders, citizens, or both.
Is line of credit good for anything?
Few counties in the world have debt ceiling laws and Washington's periodic lifting of borrowing limits allows Congress to pay for spending already authorized.
Treasury Secretary Janet Yellen and other policy experts have called on Washington to eliminate the cap, as it amounts to a bureaucratic stamp on decisions that have already been made.
Some analysts have proposed that the Treasury could head off the crisis by minting the multitrillion-dollar platinum coin and putting it into the government's account, an idea widely seen as a bizarre gimmick. Others argue that the debt cap itself violates the US Constitution. But if the Biden administration invoked that argument, a legal challenge would follow.
The debt limit is supported by Democratic and Republican lawmakers alike and both have used it as leverage when their party does not control the White House. This doesn't seem likely to end anytime soon.
What happens when Washington can no longer borrow money?
Shockwaves will ripple through global financial markets as investors in the U.S. questions the value of bonds, which are viewed as the safest investments and serve as the building blocks for the world's financial system.
If the government were forced to make payments on things like soldiers' pay or Social Security benefits for the elderly, the US economy would almost certainly be hit by a recession. Economists expect millions of Americans to lose their jobs. Investors are already worried and are demanding higher yields for some US debt securities that come in close to expected performance.
How did we get here?
Republicans won control of the House in the November elections, increasing their ability to uphold legislation such as raising the debt-limit.
House Speaker Kevin McCarthy has said that spending cuts would need to be part of any debt-limit increase. Biden's White House has vowed that a Republican "hostage-taking" strategy won't work. Haven't we heard this song before? Such fractiousness has been a part of American politics for decades, but it has worsened significantly since 2010, when the Republican Party came to power.
In a 2011 demonstration, House Republicans successfully used the debt ceiling to extract sharp limits on discretionary spending from Democratic President Barack Obama.
No comments:
Post a Comment