Monday, January 30, 2023

The United States has reached its debt ceiling. And now that?

The United States reached its current debt ceiling of $31.4 trillion on Thursday. Despite what it may seem, the situation is not new and that limit to the money that the country can legally borrow has been raised 78 times since 1960. So what happens now?

“This letter serves to notify you of the extraordinary measures that the Treasury has begun to take today,” the US Treasury Secretary, Janet Yellen, wrote today to the leaders of both houses of Congress to explain how the Administration will try to avoid a default of the national debt in the coming months.

These measures include suspending, until June, payments to the pension fund for public workers that are not immediately needed – payments that must be made when the debt ceiling is lifted or suspended.

Payments to the health service of Postal Service retirees are also suspended.

The adjustments are intended to prevent, at least for the next few months, the country from defaulting on its public debt, something unprecedented in history.

But if Congress, whose control is divided between conservatives -House of Representatives- and Democrats -Senate- does not agree to raise or suspend the ceiling, the country will be forced to default on its debts, which could trigger a global financial crisis.

It is, in fact, a constitutional mandate that “the validity of the public debt of the United States authorized by law (…) must not be questioned, an argument that the White House uses to criticize the Republican legislators who have proposed to establish conditions to give light green to a ceiling increase.

Here’s the crux of the matter: Conservative lawmakers, including House Speaker Kevin McCarthy, have suggested they will ask for budget cuts to agree to lift the cap.

Some US media view the matter as a demand from the most reactionary congressmen of the Republican Party, who wield great power in the chamber for the narrow majority of their party.

The truth is that it is not the first time that conservatives have tried to link the debt ceiling to the approval of spending limits.

In 2011, during the presidency of Barack Obama (2009-2017), the Lower House, then also controlled by the Republicans, refused to raise the limit until the Democrat agreed to approve a series of restrictions on public spending that have been in force. until very recently.

The confrontation generated the greatest uncertainty in financial markets since the 2008 crisis, and resulted in an increase of 1.3 billion dollars in financing expenses for the year 2011, according to the US Government Accountability Office (GAO, in English).

The agreement then came two days before the United States faced the situation of being unable to meet its debts, something that led the risk agency Standard and Poor’s (S&P Global) to lower the country’s credit rating from “AAA” to “AA+”.

The debt limit measure was introduced in 1917 in the United States to stop having to approve every Treasury spending request during World War I, without losing sight of the size of the debt.

As highlighted by the Brookings Institution, no other country in the world, except Denmark, has a separate rule that limits debt, something that for this laboratory of ideas demonstrates the “uselessness” of the measure.

Many media warn that defaulting on the debt could lead the United States to suffer an immediate recession. As an example, Brookings explains that in 1979, due to an administrative error, the country suffered a partial default that raised financing costs by 40,000 million dollars in current currency.

A total default “would be playing with fire and would jeopardize the position of the US as a risk-free borrower in global credit markets,” the institution says.

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