The US government is facing the risk of defaulting on its debt as early as next month, unless Congress agrees to raise the legal cap on the national debt, known as the debt ceiling. However, talks between President Joe Biden and congressional leaders from both parties ended on Tuesday with no deal in sight.
The debt ceiling is currently set at $31.4 trillion, which is more than 120% of US GDP. The US Treasury Secretary Janet Yellen announced on Thursday that the country has hit its borrowing limit and must take extraordinary measures to delay a catastrophic and once-unfathomable US debt default.
These measures include delaying contributions to federal employee pension plans, suspending investments in certain trust funds, and redeeming existing Treasury securities. However, these steps can only buy a few weeks or months of time before the Treasury runs out of cash to pay its bills.
If Congress fails to raise the debt ceiling by then, the US government would have to stop paying some of its obligations, such as interest on its debt, Social Security benefits, Medicare payments, military salaries, and tax refunds. This could trigger a global financial crisis, as the US dollar and Treasury securities are the bedrock of the international monetary system.
The last time this happened, in 2011, the US saw its credit rating downgraded and interest rates on its existing debt go up. The stock market also plunged by 7% in one day. Many economists have warned that a similar or worse scenario could unfold this time.
However, raising the debt ceiling has become a political weapon in Washington, as Republicans have repeatedly used it as a means of extracting policy concessions from Democrats. They have demanded spending cuts and other conditions to be agreed before they vote to raise the limit.
Democrats have rejected these demands, calling them extortion and irresponsible. They have argued that raising the debt ceiling is a routine and necessary step to pay for the spending that Congress has already approved, not to authorize new spending. They have also accused Republicans of hypocrisy, pointing out that they raised or suspended the debt ceiling three times during the Trump administration without any conditions.
Biden and the Democratic leaders are calling for a “clean” measure to raise the debt ceiling – that is, one that is not tied to any other legislative measures. They have also suggested that they could use a parliamentary procedure known as reconciliation to raise the limit with a simple majority vote in the Senate, bypassing Republican opposition.
However, this option would require all 50 Democrats in the Senate to agree on a specific amount and duration for raising the debt ceiling, which could be difficult given their internal divisions. It would also take time and consume precious legislative bandwidth that Democrats want to use for passing their ambitious social spending and infrastructure bills.
As the clock ticks down to a potential default, both sides are digging in their heels and blaming each other for the impasse. The White House has said that Biden is willing to continue talking with congressional leaders, but has also urged them to act quickly and responsibly.
Meanwhile, some lawmakers and legal experts have floated the idea of invoking the 14th Amendment of the US Constitution, which states that “the validity of the public debt of the United States … shall not be questioned”. They have argued that this provision gives Biden the authority to unilaterally raise or ignore the debt ceiling if Congress fails to do so.
However, this option is fraught with legal and political uncertainties, as it has never been tested before and could face legal challenges from Republicans. It could also undermine Biden’s credibility and legitimacy as a president who respects the rule of law and congressional authority.
The US debt ceiling crisis is far from over and could get worse before it gets better. The stakes are high for both parties, as well as for the American people and the world economy.